Here are the dangers of loan stacking for SMEs

Maintaining a steady cash flow is one of the biggest hurdles for business owners in today’s challenging economic climate.

Access to the right funding at the right time is critical for managing seasonal slowdowns and capitalising on growth opportunities.

Brent Downard, head of credit at Merchant Capital, said when a single loan doesn’t seem like enough, some businesses turn to loan stacking – a risky approach that can lead to financial strain.

He added that it is important for small and medium enterprises (SMEs) to know the dangers of loan stacking.

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What is loan stacking

Loan stacking is when an individual or business takes out multiple loans from different lenders within a short period.

Downard said loan stacking might seem like a quick fix, but it often results in overwhelming repayment obligations, higher interest rates and ultimately strained cash flow.

“Asset-free growth capital allows businesses to secure the funding they need, without the financial pitfalls of managing multiple loans.”

Understanding loan stacking

He added that loan stacking leads to a tangled web of repayments, increased costs and potential damage to a business’s financial health.

“Loan stacking may seem like a good kick, but you end up the loser.”

Downard said he has seen clients use their revenue to repay loans. “Even though their mark-up on goods being traded was 100%, they essentially used 100% of their gross profit to service their debt. It was just not sustainable.”

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Risks of taking too many loans

Many businesses turn to loan stacking due to limited access to fast, asset-free funding. However, Downard explained that the risks outweigh the benefits:

Overwhelming repayments: Juggling multiple loans means juggling multiple repayment schedules, which can quickly become unmanageable.

Higher interest rates & fees: Each additional loan typically comes with increased costs, especially as lenders assess the risk of multiple debts.

Credit score damage: Missing payments or defaulting on stacked loans can negatively impact a business’s credit score, making future financing even harder to secure.

Strained cash flow: Rather than relieving financial pressure, loan stacking often exacerbates cash flow issues, leaving businesses with fewer resources for growth.

Stack your benefits, not your loans

He advised business owners to think strategically about their funding choices.

Instead of accumulating debt, businesses should partner with a lender who understands their unique challenges and provides solutions that align with their ambitions.

Downard said business owners must ask themselves five strategic questions before seeking funding:

1. Is it better to save for a project or expansion, or ride out a rough period, rather than take on debt?
2. Do you fully understand the costs and the repayment structure?
3. Can the business comfortably manage the repayment schedule?
4. Will the profit generated by the loan exceed its cost?

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