Loan Stacking: Why You Should Avoid It

Camino Financial01 Nov 2023
The financial pitfall of "loan stacking"—simultaneously having multiple loans from different lenders—can lead to a perilous debt cycle. This article unpacks why avoiding loan stacking is crucial for financial well-being. We'll outline its risks and offer smarter alternatives for managing your financial needs. Stay with us to navigate the financial world safely and confidently.

What is Loan Stacking?

Loan stacking refers to the practice of obtaining multiple loans or cash advances simultaneously to tackle cash shortages. 
This "stacking" can dangerously increase your monthly debt payments and potentially endanger your business by pushing it toward default.

Why Should You Avoid Loan Stacking?

Securing additional debt after receiving a commercial loan can complicate making your monthly payments, thereby jeopardizing your business. It's commonly said that "it takes money to make money," but excessive "loan stacking" can burden your business or personal finances with overwhelming debt payments. Lenders evaluate your "global cash flows" monthly when approving a loan, ensuring your repayments pose minimal risk of default. However, if you acquire more loans, the cumulative payments could surpass your cash flow capacity, possibly leading to a default on one or more loans. This scenario can seriously damage your financial standing and credit score. Numerous offers for quick cash loans may seem enticing, especially for small business owners, but we strongly advise against accepting multiple business loans within six months of closing another loan.

Alternatives to Loan Stacking

To bolster your cash flow without resorting to another loan, consider these non-debt alternatives:
  • Implement a 12-month cash flow forecast to better plan your finances.
  • Analyze your financials thoroughly to identify opportunities for pricing or cost adjustments.
  • Engage in discussions with major suppliers to negotiate improved terms.
  • Ensure timely bill payments to evade late fees.
  • Re-negotiate payment terms with your clients - sometimes, requesting an earlier payment can make a significant difference.
By taking these steps, you can avoid the pitfalls of loan stacking and manage your cash flow more effectively.

Frequently Asked Questions

What are my global cash flows?

Global cash flows are the amount of your net business cash flows plus other household income, less fixed personal obligations (e.g. housing rent, car payments, and personal debt payments).

What if I didn't get approved for the loan amount I requested?

We approved you for a lower amount because your global cash flows were less than the monthly payments resulting if we had approved your requested loan amount. The loan amount we approved ensures that your global cash flows exceed your monthly payments.

How many loans can you take at once?

The number of loans you can take at once largely depends on your creditworthiness and the specific policies of lenders. There isn't a universal limit set by law, but lenders will assess your debt-to-income ratio, credit history, and ability to repay before approving additional loans. However, taking on multiple loans simultaneously can be risky and cause financial distress. It's always wise to consult with a financial advisor or credit counselor before taking on additional debt.

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