In today’s challenging economic climate, maintaining steady cash flow is one of the biggest hurdles for business owners. From managing seasonal slowdowns to capitalising on growth opportunities, access to the right funding at the right time is critical. However, when a single loan doesn’t seem like enough, some businesses turn to loan stacking—a risky approach that can lead to financial strain.
Brent Downard, Head of Credit at Merchant Capital, warns against the dangers of loan stacking and highlights the importance of finding the right funding partner for sustainable business growth.
“Loan stacking might seem like a quick fix, but it often results in overwhelming repayment obligations, higher interest rates, and ultimately, strained cash flow,” says Downard. “Asset-free growth capital allows businesses to secure the funding they need—without the financial pitfalls of managing multiple loans.”
Understanding Loan Stacking
Loan stacking occurs when a business takes out multiple loans from different lenders within a short period. While this strategy may provide quick access to cash, it often leads to a tangled web of repayments, increased costs, and potential damage to a business’s financial health.
Downard likens stacking to scoring an own goal. It may seem like a good kick, but you end up the loser. He uses the example of a Merchant Capital client that was tempted by offers of extra capital injections from ‘rogue’ lenders and, as a result, almost bankrupted itself. “Ultimately, 50% of this client’s revenue was being used to repay loans. Even though their mark-up on goods being traded was 100%, they were essentially using 100% of their gross profit just to service their debt. It was just not sustainable.”
The Risks of Loan Stacking
Many businesses turn to loan stacking due to limited access to fast, asset-free funding. However, Downard explains that the risks outweigh the benefits:
- Overwhelming Repayments: Juggling multiple loans means juggling multiple repayment schedules, which can quickly become unmanageable.
- Higher Interest Rates & Fees: Each additional loan typically comes with increased costs, especially as lenders assess the risk of multiple debts.
- Credit Score Damage: Missing payments or defaulting on stacked loans can negatively impact a business’s credit score, making future financing even harder to secure.
- Strained Cash Flow: Rather than relieving financial pressure, loan stacking often exacerbates cash flow issues, leaving businesses with fewer resources for growth.
Stack Your Benefits, Not Your Loans
Merchant Capital encourages business owners to think strategically about their funding choices. Instead of accumulating debt, businesses should partner with a lender who understands their unique challenges and provides solutions that align with their ambitions.
For their part, Merchant Capital is a founding member of the South African SME Finance Association (SASFA), an industry best-practice body that compels members to adhere to strict guidelines that prohibit loan stacking, thus ensuring that lending practices remain responsible, ethical and sustainable. Downard advises entrepreneurs and business owners to steer clear of lenders that are not SASFA members.
A responsible lender would perform due diligence on all its loan applications, analysing the financial health of applicants to determine appropriacy and affordability before granting funding. Merchant Capital also encourages business owners to ask themselves five strategic questions before seeking funding:
- Is it better to save for a project or expansion, or ride out a rough period, rather than take on debt?
- Do you fully understand the costs and the repayment structure?
- Can the business comfortably manage the repayment schedule?
- Will the profit generated by the loan exceed its cost?
- Is the lender a reputable SASFA member?
For those businesses that are already in a loan cycle but that want to move over to a different lender for responsible reasons – better rates, for example – it is critical to settle with the existing provider when making the move, says Downard, because not doing so would mean exposing your business to unnecessary cashflow risk “At Merchant Capital, our primary goal is to enable the growth of SMEs. We work closely with our clients to provide tailored financial solutions that support their business objectives without compromising their financial stability, and we find solutions for tough times. At all times, we prioritise our clients’ long-term success,” says Downard.
