Loan stacking is when a business takes out several loans or finance deals, sometimes in quick succession. The Finance & Leasing Association (FLA), the trade body for asset, consumer and motor finance, has called for action on it. It says a number of its members have reported concerning trends.
The FLA wants lenders, brokers, industry bodies and policymakers to work together to understand the problem and identify any gaps in lending practice.
01What the FLA said about loan stacking
According to the FLA, the risk comes when the combined repayments become more than a business can sustain.
Its members report businesses under cash flow pressure taking on extra borrowing without enough thought for what they already owe, or for their longer-term ability to repay.
Shanika Amarasekara, the FLA's chief executive, put it this way.
"For a business facing immediate cashflow pressures, additional borrowing may appear to provide a solution. But if that borrowing is not structured appropriately, it can simply defer the problem while increasing financial pressure on the business."
The National Association for Commercial Finance Brokers has also written to its members about loan stacking, according to Business Matters. Its letter, sent in September, said the practice can create significant risks for customers.
02Why does it happen?
Short-term finance is quick to arrange. When money is tight, a second or third facility can look like the fastest fix.
The trouble is that each new deal adds a repayment. According to The Times, loans taken out this way are usually at high interest rates and over short terms. That can squeeze cash flow even harder than before.
03Questions to ask before you borrow again
- Can the business afford every repayment together? Add up all your monthly commitments, not just the new one.
- What is the new money for? Borrowing to pay an old loan is a warning sign.
- What does it cost in total? Compare the full cost, not only the monthly payment.
- Would one facility work better than several? Replacing a few short-term deals with one longer loan can lower the monthly cost.
If you are planning further growth finance, it helps to look at the whole picture first. A broker can look at your existing commitments and the deal across a wider range of lenders.
Our guides explain when one loan beats three and what a merchant cash advance really costs.
