Hidden Dangers of Loan-Stacking

Sadie Keljikian, Express Trade Capital

One of the most consistent difficulties one encounters in the process of expanding a wholesale business is the cash flow “crunch” that can occur when your customers want to order more of your products than you can afford to sell at once. Most customers don’t realize that wholesalers must pay their suppliers, shipping costs, and operational funds in the process of selling their goods to retailers. There are a few ways of handling this without having to turn down the sale. Many businesses choose to take out traditional-style loans as needed, but this can actually create more difficulty in managing your business’s finances.

It’s best to borrow conservatively.

If you receive multiple loans to boost your business’s cash flow, each one can hurt your credit, especially if you receive them in quick succession. When a business takes out multiple loans quickly, it implies that the business carries significant debt and very little collateral, which in turn, indicates high-risk to lenders. In addition, the more loans you take out, the harder they become to acquire, especially if the financial institution from which you borrow performs “hard” credit inquiries.

You may or may not be familiar with the concept of hard credit inquiries, but you’ve certainly been the subject of one at some point. Financial institutions perform hard credit inquiries (as opposed to soft inquiries) when a business or individual is actively seeking credit. This can be in the form of a credit card, credit line, loan, mortgage, and sometimes other financial commitments, like rental agreements. Hard inquiries reveal more details about your business’s credit and bill-paying habits, so a high credit score doesn’t necessarily guarantee approval.

When an institution performs a hard credit inquiry, your credit score will inevitably drop a few points, which isn’t typically a problem unless your credit is already compromised. Again, taking out multiple loans in a brief period will deplete your credit score more noticeably, so avoid it wherever possible.

Know your options and choose wisely.

A popular fix for mounting interest charges on multiple loans is debt consolidation, or “loan stacking.” Debt consolidation companies help you to pay off your debt fully and more quickly than you could on your own by decreasing your interest rates and combining your payments. Sounds perfect, right? But beware, there is more to your creditworthiness than simply your credit score.

The problem with loan stacking is that although it can help you get out of debt, it can also further deplete your credit (though not always noticeably) in the process. For this reason, it is vital to remain informed throughout the lending process, regardless of what method you choose to pay off your debt. Often, loan consolidation companies assist you by providing another loan to pay off your debts. Again, it sounds appealing, but you need to bear a few things in mind if you choose to do this.

Issues can arise when your hard credit inquiry reveals excessive borrowing or any loan stacking. Lenders often avoid taking on customers who have a history of loan stacking because it indicates a few unfavorable habits. As mentioned above, stacking one’s loans is usually a symptom of multiple unpaid debts that accrue overwhelming interest. Obviously, this indicates to a lender that you not only have poor bill-paying habits, but that they may not receive the interest they are owed if you struggle to pay and choose to consolidate again.

Alternative lending may be a better option.

Consolidation is a double-edged sword. Repaying your debts as quickly as possible is good for your credit score, but using consolidation services can still hurt your ability to borrow funds in the future. An excellent way to manage an ongoing need for working capital is to instead implement some form of trade finance, particularly factoring.

With trade finance solutions, you consistently receive funding against your purchase orders or receivables to avoid depleted operational funds. Since the funds are only provided against confirmed sales, they are typically in smaller amounts and often don’t require further action from you. In the case of factoring receivables, your financial institution buys your current receivables and collects from your customers. This means that your cash flow is sped up, you needn’t pay back any of what you receive (barring a chargeback), and you are no longer responsible for those collections.

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The long and short of it is this: business loans are useful, but be aware of how much debt you carry and make a specific plan to pay your debts. Even with sometimes helpful solutions like debt consolidation, borrowing more than you can reasonably pay back on time is unwise in the long term. When making decisions about your business’s financial future, be as conservative as possible and consider how your decisions today might affect your ability to grow or recover if you need funding in the future.

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