CFO helps Law Firm Secure £1.05m Loan from Nucleus Commercial Finance
4th October 2018

What is Loan Stacking?

This is the sneaky, tactical task of businesses taking out multiple loans, at the same time, without providing any security. Loans to reach the desired amount, can be received directly or through brokers.   For alternative lenders, this becomes a large-scale issue. Each lender cannot see the other loans that have been applied for due to it taking up to 30 days for new accounts and credit inquires to show on a credit report. As a result, the business can build up the loans which otherwise may have not been granted. Lenders are left clueless to the full picture of the businesses inability to repay. Bad debt can result.

See the bottom of this blog for an example of loan stacking

Where did this evolve from?

Since the 2008 financial crisis, banks have been less willing to give out large loans. As a result, small businesses in particular have been limited with ways to raise capital. There solution was loan stacking, where more than one loan would need obtaining, for fast fund and growth purposes. It seems feasible but isn’t all it seems…quickly you can spiral out of control and too much debt for what the company can repay occurs, as a result, increased financial difficulties.

 

Businesses tend to engage in such risky business for a few reasons:

  1. For legitimate business purposes; this being to simply access more cash, fast. Perhaps you need to purchase assets, are looking to grow, or need to pay a creditor off but cannot afford doing so from the companies own finance.
  2. To act fraudulently; to take the money and flee – with no obligation to pay it back.
  3. To repay other business loans – though, as one has said, ‘’when the music stops, everybody has got to find a chair’’ i.e it cannot go on forever!

People can get away with this due to the policing of it being so difficult.

Alternative lenders excel because of their speed and simplicity offering for the borrowers – if lenders carry out a more in-depth lending process (which ensures your capability of taking on the debt burden) and engage in due diligence, loan completion dates are delayed. This damages the user’s experience and contradicts the alternative finance’s USP. Therefore, borrowers can benefit from the lack of checks lenders do, allowing multiple loans to be taken and not picked up on.

If businesses have clean credit histories, it is easy to do so. The lender has to risk growing their loan book and managing the risk.

So long you stay on top of the payments, there is no risk? right? … No!

When finance providers give loans, they tend to give the amount they believe is reasonable with your best interest at mind. As a result, not always will the full amount you require be given, hence loan stacking occurs. We assume loan payments are monthly, though some are daily or weekly. As you pile up the loans, due dates of payments vary – yet all need to be paid out of the same bag of money.  This can lead to loopholes of debts – causing unnecessary headaches. Likewise, due dates can coincide and be too close, leaving you confused and potentially paying the wrong dates and amounts. The inability to pay the debts can lead to your own or businesses assets being liquidated, with a poor credit score being left. Furthermore, a spiral of negatives arise as this can lead to further problems with raising future capital, as well as ruining your corporate reputation.

Some safer ways to increase your capital, without having to loan stack, can be used:

  1. Approach your original lender and ask for more money – many lenders do allow borrowers to receive more funds, as long as 50% of the original loan has been paid off.
  2. Refinance your business loan – after making timely repayments on your current loan, apply for a second. The second lender will pay off your debts to the first lender, so that you only have to pay one repayment and interest rate.

Loan Stacking has consequences for legitimate borrowers. Lending rates may rise, to remove the risk of stacking, which gives less attractive terms for legitimate borrowers. Likewise, the due diligence process from alternative lenders may become lengthier, making it a longer and harder process.

Beware of the loan stacking market…ensure you know who you are working with, collect an image of their financial health, trading performance and previous financial problems. Can they repay? Is it worth it?

 

 

Example:

To operate your business, £80,000 worth of finance is required. You got to Lender A and ask for an £80,000 loan. However, they believe your business cannot handle the debt which such a large loan will leave, therefore they only offer you £20,000. This Is not what you wanted, but it is a help, so you accept it.  You then apply to lender B, who give you a further £20,000. Still not amounting to enough, you get the remaining capital required £60,000 from lender C.

You now are in debt to three different companies – more risk than intended but you have raised the required amount of finance.