Less Is More: A Guide to Loan Stacking
For many directors that’s part of the enjoyment and why they got into business in the first place. Overcoming the odds, having their decisions and gut calls proven right and achieving things they and others wouldn’t have thought possible.
These are good risks. There are also bad risks.
If your business isn’t performing well, is stuck in a trough or heading for insolvency then the risks of making poor financial decisions increases.
Loan Stacking is one such decision and it’s made worse because at the time it can look like absolutely the right thing to do for the business.
What is Loan Stacking?
Most simply it’s where a company takes out two or more business loans from different lenders at the same time. This can be from banks or other regular financial sources or from newer lending streams such as peer-to-peer platforms, secondary lenders or fin tech.
Unlike applying for funding from a traditional financial source like a bank, secondary funding usually isn’t so stringent regarding collateral or background checks and can sometimes be secured simply on the basis of personal guarantees from directors or senior management.
As an example – let’s assume a company needs £30,000 to fund an extension or other business expansion.
Their usual, main lender A will only lend them up to £10,000. With some agility and cleverness and the use of personal guarantee, they can then obtain another £10,000 from online lender B and £10,000 from online lender C. Great! They’ve got the money they need.
The first problem will be if Lender A checks their credit files and finds that they’ve obtained the additional funding from lenders B and C. Not a lot they can do right? Wrong.
The terms and conditions of loan A (and B and C) might render it null and void if the company entered into similar arrangements knowing that they may not be able to pay the amount back. Also there will usually be a condition allowing a lender to pull the lending facility and demand immediate repayment – which any could do at any time.
The loan from lender A will usually be monthly but if the loans from B or C are from alternative finance providers then the repayment terms and dates may also be different.
Some operators demand different and moveable repayment dates – every 28 days rather than monthly for example, or they could even insist on repayment on a weekly or daily basis depending on the deal they struck.
Repaying multiple loans with moving or irregular milestones could be problematic at best and this is if your business is stable and running a profit. If you run into difficulties and start missing payments to one or more lenders then things can get real ugly, real quick.
Any insolvency practitioners that investigate directors’ behaviour and events to establish how and why a company ended up in administration or insolvency will take an especially dim view of favouring different lenders even before they are called.
Needless to say, defaulting on payments also has a negative effect on credit ratings which could also draw the various loans to the attention of the other lenders. It’s their job to check the credit worthiness of their clients – especially when their money is on the line and seeing you take out lines of credit in addition to what they’ve lent out is raising a big red flag.
There are other safer ways of raising business capital for a company beyond loan stacking.
Most lenders will be sympathetic to your case if you have a proven record of trustworthiness with them and can often offer extended borrowing facilities if a proportion of the original loan, usually around 50%, has already been paid off.
You can also look to refinance your business loan with another lender. This is distinct from loan stacking as a proportion of the amount you borrow from lender B would pay off the loan from lender A so you while you have borrowed a larger amount, you still only have to budget for one regular repayment and interest rate.
Ultimately loan stacking is another symptom that your business is going through a rough storm.
This can even be a positive for the company and the individual in the long run depending on how you react to it and the decisions you make now. Contact one of our teams of advisors to set up a free conversation.
We can look at the whole of your business with an expert eye and make suggestions on how you can navigate back to calmer waters or even head to port for repairs. Taking on more debt, even for the right reasons is like taking on more water – it will just drag you to the bottom quicker.
We’ve covered the issue of taking out loans to support a business in an earlier blog post and ultimately we don’t think it’s a great idea when it comes to multiple loans.
If your business has got to this stage or is approaching it then your first call should be to one of our expert advisers rather than a loan provider. We can talk through your unique circumstances and most importantly what options your business has and the best way to proceed once you’ve made your decision.