Small business owners sometimes encounter challenges when it comes to getting financing for their company. For example, they might not get approved for as big of a loan from the bank as they were hoping for. When this happens, some business owners might be tempted to stack loans.
Loan stacking, generally, is when a business takes out loans from multiple lenders to try to get a certain amount of financing. It is important for business owners who are thinking about loan stacking to understand its risks.
There are a range of risks stacking loans can carry, including:
- Risks of contract violation: Loan stacking could, depending on how it is done, violate the terms of the contracts a small business owner has with lenders. This could get small business owners into legal hot water. It could also hurt their long-term relationships with their lenders, which could impact their ability to get financing in the future.
- Risks of taking on overwhelming debt: There may be good reasons why a lender has decided to cap the loan amount offered to a business. Going beyond this amount might expose a company to more financial risk than a business owner would be comfortable with.
- Risks of increasing the complexity of handling debt: Dealing with multiple lenders can mean navigating a lot of different payment deadlines, payment amounts and payment terms. This could increase the risks of a small business owner making mistakes when it comes to loan payments.
There are a range of alternatives to loan stacking that often carry less risk, such as seeking additional financing from the same lender in the future or loan refinancing. When trying to overcome any financing challenge, it can be important for small business owners to consider all their options, and the risks and benefits such options can carry. This can help a business owner avoid getting stuck with an option that is a bad fit and which is riskier than he or she is comfortable with.
Having the full picture of their options is also important for small business owners when their company runs into debt problems in connection to financing. So, when debt troubles arise for a business, its owners may find it helpful to go over options with an experienced bankruptcy lawyer.