If you’re actively looking for a business loan, you may be wondering if you can you take out multiple loans at the same time. And then there’s the question of whether any of your existing loans will affect your business loan application.
The answer to this isn’t a simple yes or no as it really depends on what type of loan you already have. As well as that, there are cases where you can take out a business loan when you already have an existing one, otherwise known as ‘loan stacking’ (we’ll get to that in a bit). Having some loans together can work well and be beneficial, though having multiple very similar loans (loan stacking) is something we highly recommend avoiding like the plague.
Read on to find out how many business loans you can get simultaneously and whether having other loans will affect your chances of qualifying for a business loan.
Which loans can I have when applying for a business loan?
When you apply for a business loan, especially here at Become, our lending partners don’t mind if you have the following loans already:
- Personal loan
- Car loan
- Student loan
You may notice a theme going on here, these are mainly secured loans. In other words, these types of loans have some form of collateral that gives lenders an added safety net, a way to assure that some way or another, they’ll get their money back. Although personal and student loans can be both secured and unsecured, most lenders don’t care too much if you have one or not – mainly because a business loan will be going through your business bank account, which is separate from your personal account (usually).
It’s not the same case with every lender but if you’re applying for a business loan and already have a secured loan, there’s no reason why you can’t get a secured or unsecured business loan via Become.
Top Tip: If your student loan is holding you back, look into debt forgiveness – you may be able to qualify and unburden yourself from that loan by volunteering (along with other ways).
Can you have multiple loans?
In short, yes, but when it comes to having multiple business loans – this depends on the type of loan…
Loan stacking is possible but is something that we and most financial advisers will recommend to stay well away from. You may or may not have heard of loan stacking but unfortunately, the foolish practice is increasing. The percentage of borrowers who stacked loans actually doubled between 2013 – 2015 according to the Wall Street Journal.
Loan stacking definition – a cash advance or a loan is approved on top of a loan or advance that already exists with very similar terms
Although stacking loans on top of one another may work for some, it can lead to a debt that spirals out of control, spelling bad news for businesses. Most business owners simply can’t keep up with that much debt and the lenders lose out as well with an increase in defaults.
What is debt stacking?
This is when a borrower has several short-term small business loans in a short period of time, each with very similar repayment terms and interest rates. This is different from refinancing one loan with another (which may be a good idea) because it’s actually taking out a few near identical loans at the same time – stacking them one on top of another, hence the term ‘debt stacking’.
Risks of having multiple business loans
Debt stacking is risky business even if you think your business is doing well.
The main risks include:
- Having a few loans at once adds pressure to your business’s cash flow and can slow down normal business operations
- You could be violating the terms of your first loan agreement, forcing that loan into an automatic default (always ready those T&Cs very carefully!)
- You can get drawn into a cycle of debt where the only apparent way to pay off what you owe is to take on even more debt
Many lenders won’t allow loan stacking mainly to make sure that they won’t have to compete for collateral if there is a default. For example, say you have many loans and can’t afford to repay your debt, a second lender might seize your assets that the first lender is also looking to seize, leaving the first lender losing out if the borrower defaults.
This is why most online lenders have strict anti-loan stacking policies in their agreements. It’s also why the vast majority of our lending partners here at Become will NOT approve you for a loan if you already have an existing business loan.
Debt stacking warning: If you violate your lender’s anti-stacking policy (again, make sure to read that fine print), you’ll be getting yourself ready for a whole lot of nasty heading your way – not only will you automatically default but it’ll trigger a heap of legal proceedings against you and your business – you have been warned!
So which loans can I have at the same time?
Now that we’ve (hopefully) drilled into you the importance of staying away from debt stacking, you may be wondering ‘how many loans can you have at once’? Here we’ll show you how to go about taking out multiple loans and some healthier alternatives to loan stacking.
The problem with loan stacking is that the loans being taken out have very similar characteristics and terms. It is, however, entirely possible to get different types of loan products side by side without loan stacking – just like you may have a student loan, home and car loan all at the same time and then request a business loan too.
So to answer the question of ‘how many loans can you have at once?’ the real question should be, how many of certain types? There are certain types of loan that can be paired together…
Example of business loan products that you can combine together:
- Line of credit and invoice factoring
- Line of credit from a bank and a short-term loan
- A business loan and a business credit card
- An SBA loan and a short-term loan
- Line of credit and equipment financing
These loan combinations are a lot smarter and work because the funds are used for different reasons and the terms and collateral differ. With all of that said, there is a chance that you may be able to qualify to take multiple SBA loans at once. Do your due diligence on each loan type in order to find the right financing solution for you.
Alternatives to taking out multiple loans
1. Need more funding? Ask your current lender!
If you don’t ask, you don’t get! No point trying to get another loan if you haven’t first taken a shot at asking your current lender for more funding. This is actually the first option you should consider before seeking out a new business loan entirely.
If you’ve paid back at least 50% of the original loan or proved to always make your payments on time, your lender may deem you dependable and approve your request for more funding.
Keep in mind that lenders will pay close attention to your DSCR (debt service coverage ratio) when you ask for more money. Your DSCR is an indicator of how capable you are of covering debt payments. The minimum ratio that is generally considered ‘healthy’ is 1.2, which means your income would be able to cover 100% of your debt payments and leave an additional 20% of that for you to put towards for other expenses.
The DSCR is calculated as:
2. Refinance your loan with funds from another lender
As opposed to loan stacking (where you have several separate loans), refinancing your business loan means having a new lender pay off the remaining debt you have with your old lender(s). How is refinancing a loan better than loan stacking?
Refinancing will help you handle debt in the following ways:
- It brings all of your debt under one interest rate which can be lower than the first loan you took
- You’ll have one payment schedule which reduces the stress of paying several loans back at different times in different amounts
- You’ll only have to deal with one loan provider with one set of rules
3. Use invoice factoring
Invoice factoring is a unique type of small business financing where a loan provider will front up to 80% of your unpaid invoices in return for a discounted price on those bills. That will free up a lot of cash to put back into the business that would have otherwise been inaccessible to you. After they collect the amounts due from your non-paying customers the lender pays you the remaining amount, minus a factor of 1-4% to cover the costs of the services they provided you.
This is a very useful alternative to loan stacking since you, the business owner, aren’t actually responsible for paying the lender – your customers are! That being the case, the lender is going to be more concerned about the reliability of your customers paying their invoices, as opposed to your own creditworthiness. If unpaid invoices are a recurring problem, it’s best to develop a strategy to deal with them.
Can you have multiple loans? We advise that you try asking for more funds from your current lender first but if you can’t get any, make sure you take out another loan that can combine well with the one you currently have.
Make sure that you do your best to avoid loan stacking unless that is, your business is growing extremely fast and you have a clear repayment plan up your sleeve (and aren’t violating the terms of your original loan!).