New business-owners often take out loans when starting up their small businesses. In fact, in many cases, these forms of funding are essential to getting one’s dream off the ground. However, if you’re not careful and you take on more debt than you can handle, multiple loans can put you in a difficult financial spot. Here’s why stacking loans can be bad for your small business and the importance of managing the risks.
What Is Loan Stacking?
Loan stacking is the process of systematically taking on multiple outstanding loans. Though you may have initially started with one loan to get your business going, you can opt to take out more shorter-term loans to supplement your company’s income. Doing so means you’ll have several loans to pay back congruently, and you may find yourself owing more than you have the means to pay back.
Why Businesses Tend To Stack Loans
There are several reasons why a start-up company might choose to take out more than one business loan. For one, loans establish credit and even improve it as you successfully pay those funds back. Loans also make it possible for you to obtain a larger sum of money later to pay for all the essential start-up costs of equipment, employees, and marketing. Still, as we mentioned before, taking out too many loans can leave you in a position in which paying them all back is difficult.
The Dangers of Business Loan Stacking
Stacking loans can be bad for your small business for a series of reasons, including the cycle of debt. As you continue to acquire upfront funds through the loans, you’re also increasing the amount you’ll need to collectively pay back each month. So if your business isn’t generating the cash you need it to, you’re only going further into debt to make your payments. Additionally, having multiple credit sources may also violate the conditions of your very first business loan. This can make that initial loan due much sooner than you can afford.
At Pango Financial, we’re dedicated to ensuring that you get everything you need out of your new business start-up funding without setting yourself up for difficulties later. Our team of advisors will work with you directly to determine the best funding for your business situation and teach you how to avoid loan stacking and other harmful situations.