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Should your business take on multiple loans?
Let us help you decide whether taking on multiple loans is the right choice.
If business growth is on the up and your company isn’t getting the all cash it needs from your current loan, you may be wondering whether it’s time to apply for one or even a couple more.
Whether you’re looking to replenish stock that’s flying off the shelves or to cover your increasing wages, taking out multiple loans is a serious consideration for an expanding business. Whatever the loan purpose, the potential consequences of applying for another loan must be considered before a decision is made.
First, does taking out another loan make financial sense for my business?
There are many reasons your company might feel that a second loan is necessary. It could be that the previous lender provided you with less funds than expected or maybe opportunities in your industry have dramatically increased since your original loan began. Either way, you need to be confident that a boost in funds now will ultimately mean greater revenue down the road.
If the answer is "yes", here's a selection of lenders to compare
How do lenders perceive several open loans when I apply?
Thoughts of multiple loans from banks and other lenders can be negative. Lenders consider the loan you have been granted to be a carefully calculated sum of how much you'e be able to repay in the given time. Taking on a second loan is vastly increasing the risk of defaulting on the first loan, with no added reward for the lender.
With that being said, it is possible to convince a lender that you're able to repay the next loan you're apply for. The key is to demonstrate an increase in revenue and cash flow through your balance sheets and accounts.
Will lenders allow me to have multiple loans at once?
Many lenders have rules and administration in place to prevent their customers from taking out more than one loan at a time. Those that don’t have these policies will likely still be reluctant to offer you approval. Your best chance of making it happen is with evidence of regular repayments and a faultless credit score.
Factors such as late payments, assets tied up as collateral and high interest rates on your existing loans could make getting another loan difficult. In these circumstances, the lender may be unconvinced of your ability to keep up with more fees and repayments.
Many lenders require you to have paid at least 50% of your current loan balance before applying for another loan with them.
Is loan stacking bad for my business?
Loan stacking can be risky. This is because you'll be taking on multiple loans at once, usually with similar interest rates and repayment terms. Having more than two or three outstanding loans can put your cash flow into a rut. Whatever money was coming in before the loan will be sucked up by the payments you need to make daily, weekly or monthly.
Loan stacking can also violate your loan agreement. Many unsecured loans aren't really without collateral — instead, the lender puts a lien against your business and may require you to sign a personal guarantee as well. If you stack loans, you could end up defaulting on your initial loan because of this breech in contract.
Are there alternatives to business loans if I still need financing?
If you’re applying for business finance and not sure if you’ll need another loan in the future, there are ways you can safeguard yourself now. Consider some of these finance options:
- Business line of credit. A business line of credit lets you draw up to a certain limit and you only make repayments on what you use. You can be approved for a higher limit than you need at the time and then use it should the need come up.
- Credit card. You can opt for a personal credit card or a business credit card and only use it when you need it. If you have a no annual fee credit card you’ll only pay interest on the funds you use and you can take advantage of benefits such as additional cardholders and frequent flyer points.
- Refinance your current loans. Multiple loans means multiple payments — and the possibility of being late on those payments. By refinancing your business loans, you can lower your monthly payment, the amount you owe on interest and make it easier to cover your outstanding debt.
- Request more funding. If your business has seen an increase in revenue and needs more funding, your current lender may be willing to extend a larger amount to cover your business’s needs. This is generally reserved for those who have paid down a large portion of their loan or who have a strong payment history.
When is loan stacking a good idea?
Loan stacking can be useful when used appropriately and within the stipulations of your contracts. As long as you know how the money will be used and how you can pay it back, you may find loan stacking a good tool for your business.
- Your business has been growing rapidly. When your business is growing faster than you can keep up with, loan stacking may help create the intitial money you need to expand.
- The loans generate more business. Taking out a loan for marketing and another loan for new equipment will help your business grow. Any loans that don't use the same security and increase revenue are generally considered safe to stack.
- The loan purposes are complementary. By borrowing loans that don't use the same collateral and have different terms, you may be able to utilize multiple loans at once with less risk than stacking might otherwise create.
- Your business has two or three loans. Stacking a few business loans likely won't break your business or put you under, and if the loans complement each other, a few business loans to cover necessities could be helpful.
Finding the right lender
If you aren't being accepted by the lenders you apply for, it can be tempting to continue to seek alternative financing. While there are some reputable companies offering alternative finance for bad credit or little cash flow, you'll want to avoid becoming a victim of a scam.
Always look into the reputation of the lender before you do business with it and read through any documents carefully prior to signing them. Lenders should be forthright with all fees and rates and be transparent with the structure and terms of the loan.
If your business has grown dramatically since you last took out a loan, that may justify your reason for borrowing and help your chances of being approved.
Taking out a second loan to help you clear another one is a dangerous and unsustainable tactic that may only serve to increase penalty charges and debt. If paying off a loan is causing you difficulties, it could be time to consider short-term options such as invoice factoring and even negotiating with your creditors.
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