Business loans should be a way for you to grow your business—sometimes that comes in the form of paying off existing bills and obligations before you can focus on future expansion. That’s an entirely common and valid reason to apply for a loan—and one we frequently fund. However, sometimes the lure of additional money to fund your business can be too enticing, and that’s where small businesses and lenders can get into trouble.
Business loans can be incredibly helpful when you need capital for your business. The goal of any borrower is to acquire the best loan possible, but borrowers often make mistakes which limit their options and increase borrowing costs. One such mistake borrowers often make is called ‘loan stacking’.
This article will discuss what it means to stack loans, why stacking limits borrowers’ options, and how you can avoid this mistake in your borrowing practices.
Loan stacking or loan churning is a process where a borrower takes out new loans to pay off the old ones. What starts as a monthly payment plan can turn into an endless cycle of debt and fees if not paid on time. Loan stacking should be avoided at all cost and here’s why:
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1. It is against the terms for most business loans
Most business loans forbid loan stacking because it can put the business owner at risk of wage garnishment and property liens to pay back the loans which will destroy the business credit score and effect future financing opportunities.
2. You can’t improve your credit score
A loan can only be reported to one credit bureau at a time. What this means is if you have two different loans with $75,000 and $50,000 each reporting to Experian, they will show up as one $125,000 loan on your report. This doesn’t affect you because all banks usually require for them to be consolidated once the payment plan has been completed. However, if you instead pay off one of the loans first before consolidating them, both accounts are updated onto your credit report showing that they are paid in full. Now which do you think would do more for your credit score? A new account or an old account being closed? You guessed it! Closing an account does more for your credit score.
3. Paying off the Loans is More Difficult
Most businesses can have times of struggles and their cash flow is not as strong as they would like. If they have multiple loans they may only be able to pay on one loan and forego a payment on others during this time. This means that your business loans will become overdue and can cause additional interest charges to be added to your loan making it even more difficult to pay.
4. Being Able to Upgrade or Change Your Business Model
In today’s world of technology being able to upgrade and grow your business is essential to your success. Being unable to grow your business can be limited by having multiple loans to pay. Loan stacking can cause you to lose control of the future direction of your company.
5. It’s not tax deductible
There are multiple types of business expenses that are deductible on your taxes but if you start having to many business expenses listed on your tax-deductible expenses it can create a red flag to the IRS and open an investigation.
There are many more reasons why loan stacking should be avoided. If you want to get information on the proper way and the most beneficial way to grow your business and how to keep your loans in check you can contact Progressive Business Capital online or by phone @ (800) 508-4532 to discuss loan options that will be the best option for your business.
