The first few years of a business are crucial. Business owners must maximize the interest that new establishments enjoy when they first open, and then figure out how to maintain that momentum and keep their customers’ attention moving forward. Unfortunately, about 30 percent of startups in Singapore fail within the first three years.
When a new business is on the brink of closing because of a lack of funding and income, the only way to keep it going is to acquire more capital. Its owners will no doubt look for business loans to sustain the business long enough to have another shot at success.
This is where loan stacking comes in.
What Is Loan Stacking?
Loan stacking is the practice of taking out multiple loans from different lenders all at the same time. Some business owners take an even bigger risk and apply for personal loans, then use the money to keep their business afloat.
A feature in The New Paper revealed how startup owners in Singapore accumulated up to $600,000 in personal debts to pay off their business loans and their workers’ wages. In the case of one business owner whose venture failed, his daughter ended up with a $200,000 debt after signing as his guarantor.
According to the feature’s interviews, business owners are aware that loan stacking is risky, but they still consider it as a last-resort solution when they can no longer get extra credit from their banks. Banks are averse to risky borrowers, so they’re unlikely to grant a second loan to a business that’s progressing slower than expected. Business owners feel that they have no other choice but to apply for more loans where they can get them.
The Problems with Loan Stacking
Here’s what’s wrong with startups resorting to loan stacking during their first three years in business: their debt will only keep getting bigger. The terms for business loans issued by banks are commonly three to 10 years. Applying for more loans within this term would mean doubling or tripling what a business owes.
This also explains why, as discussed above, many business owners take out a personal loan: it increases their chance of getting approved. However, owners will still carry the burden of repayment. If their business fails to generate income at a rate that can sustain (1) the business, (2) the old debt and (3) the new debt, this entire endeavor of keeping head over water will also fail.
The financial burden and threat of bankruptcy are not the only problems of loan stacking. Business owners who are struggling to pay all of their debts are often struck with a feeling of embarrassment and isolation. It may shame them to admit their financial troubles to their peers and family, so they struggle to solve the problem on their own. This can cause them immense mental and physical stress.
Alternative Solutions to Loan Stacking
So how can businesses survive without resorting to loan stacking? Owners can explore other lending methods that will take their existing debts into consideration. It also helps to look beyond the traditional and consider private lenders instead of applying solely at banks (because even though they advertise different loan requirements and minimum credit score, they think alike. So if one bank declines a loan application, there’s a good chance that others will deny it, too).
Here are some alternative lending options for startups and SMEs:
- Loan consolidation – This will be helpful to business owners who have already taken out several loans. Consolidating may extend the terms of the loan, but the biggest advantage is that each monthly payout becomes more affordable. Debtors can slowly pay off all their debts without fear that they won’t have enough left to pay the rent or pay their suppliers.
- Custom loans –Not all banking institutions or indeed private lenders offer custom loans, but those that do usually offer flexible terms. Custom loans address a specific funding need and recognise the current cash flow, budget, and paying capacity of the borrower. It’s possible, therefore, for custom loans to have low interest rates and affordable terms.
Besides finding a loan option with kinder terms, business owners will also want to find lenders that serve startups and small businesses. They are more attuned to the struggles and needs of SMEs and often offer diverse and flexible loan products. Some even provide financial advisors to help clients manage their debts and advise them on how to make the most of their loans.
Borrowing money is inevitable when you are a business owner. What’s important is knowing how to manage (and use money wisely) so that debts don’t take over your business and personal life.