Loan Stacking: A Guide for Borrowers

Understanding the concerns and challenges lenders face can help you avoid what lenders see as “red flags” and make yourself an ideal candidate for the next time you need a business loan. The age of online lending has brought a couple of new challenges. One of the biggest is loan stacking. 

What Is Loan Stacking? 

Loan stacking is the practice of taking out multiple loans from different bankers at the same time and letting the amounts “stack up.” Traditionally, if you took out a loan for $20,000, and then you received another loan for $40,000, you would use the second loan to pay off the balance of the first loan. 

Loan stacking occurs when you don’t follow that practice. As Brock Blake, Lendio’s CEO, explains, “Stacking means that you don’t pay off the other loan, just add $40,000 on top of that. So now, the customer has the $20,000 loan and a $40,000 loan. And so they’ve got $60,000 worth of loans outstanding, a larger payment, and in some cases that’s appealing to that business owner because they think more money is better. But then they get caught up in high payments.” 

The Dangers of Loan Stacking for Lenders

When a lender approves your loan, they set the amount based on what they think your business can reasonably repay. Even if the amount is less than you originally hoped for, it’s often for the best. Stacking multiple loans can come back to bite you if those payments pile up. You may find yourself behind on not just one, but multiple loans. 

From a lender’s perspective, loan stacking increases the risk that the borrower will become delinquent on their loan. According to a 2015 study conducted by credit reporting agency TransUnion, loan stacking accounted for $39 million of charge-offs, the point at which the lender deems it unreasonable to expect repayment. That number accounted for 7.8% of total charge-offs. 

In addition to borrowers inundated by payments, lenders have to look out for borrowers with malicious intent. Some borrowers will intentionally stack loans without any intention of paying them back. 

The Risks of Loan Stacking for Borrowers

We’ve covered this one already, but it’s worth repeating: stacking loans can give you a case of mo’ money, mo’ problems. You’re more likely to let payments build up, fall behind in repayment, or go delinquent on a loan—which is counterproductive to that business credit you’re trying to build.

Loan stacking may also jeopardize your ability to get financing in the future. As we’ve discussed, lenders really don’t like it when you stack loans (and with good reason). Some lenders include a clause in the lending contract that stipulates the borrower can’t stack loans. If you’ve signed a contract with a clause like this and your lender discovers you’ve stacked a loan, they may not lend to you in the future. 

While loan stacking may seem like it’s giving you more capital, it works against everything you’re trying to build in your business financing. It will affect your business credit negatively, and it may make it harder to qualify for another business loan. Barring yourself from access to future financing ultimately costs more than the benefit of a bit more cash in the short term. 

How You Can Protect Yourself

There are 2 main ways that loan stacking can occur—borrower-initiated loan stacking and lender-initiated loan stacking. You want to steer clear of both of them. 

Borrower-initiated loan stacking is the process where the borrower seeks out additional loans. This one is easy for you to avoid because all ya gotta do is… refrain from taking out new loans if you already have one (unless you pay off the first loan with the second, which is a whole different can of worms). 

But what if a new lender comes to you and offers you a new loan? Borrower beware. Some unscrupulous lenders comb public records looking for businesses that have recently taken out financing. They then try to sell those borrowers loans with poor terms, with little interest for how it’s going to affect your business credit score. 

The best way to protect yourself is to do your due diligence on any in-bound loan offer. You want to vet lenders the same way they vet you. If you have questions, talk to an expert. The same way you go to your doctor for questions about your health, you can go to your Lendio Funding Manager for questions about your financial health. They’ll help you understand the fine print, make sure you’re getting the best terms, and help you avoid anything that could hurt you down the road. 

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