Stacking: Understanding Risks and Alternatives

Taking on multiple fundings can add a significant financial burden to small businesses.   Consider the risks and alternatives before adding new advances or loans.

Stacking: What it is & Why it Happens

Cash advances and short-term loans can be a great resource to grow your business. However, with the rapidly growing alternative lending channels, we’ve seen far too many small businesses get lured into the trap of accepting multiple advances to fund their daily operations. This is called stacking.

Since many people have multiple personal debts, such as mortgages and car loans, it can seem that carrying several loans is the way of the world…. but, with 50% of small businesses not surviving the first five years, let’s pause and reflect on why stacking is a risky business — even for long-standing businesses.

Responsible lenders have specific formulas to evaluate the maximum amount of monthly revenue that should be used to affordably service debt, and offer advances or loans that are designed to support growth and keep the business sustainable. At Breakout Capital, we have policies that prevent stacking to protect the financial health of our small business partners. We also understand that, as a small business owner, you can’t always predict when you will need additional funding, whether its to repair a broken down truck or oven, or to take advantage of a great deal on a new order of inventory. Instead of taking an additional loan or advance that can more than double your daily payments, we offer our customers the ability to request additional capital from us at any time. Following a simple no-fee, re-underwriting, many of our customers are able to access additional capital from us without changing their daily, weekly, or monthly payment.

It’s important to understand why and how stacking happens so you can avoid the traps. The lure of “easy” money to fund a growing business is enticing to small business owners — and to commission-focused brokers. However, it’s critical that business owners understand the implications of taking on additional loans or advances.

• Is the lender, funder, or broker looking out for your best interest as a business, or are they simply looking for an additional commission?

• Do you understand the true price of the funding and the amount of your revenue that will be paid to the funder?

• Can you afford to pay it back without taking on additional, even higher cost capital?

• Are you aware of all fees associated with the transaction?

• Have you read your initial funding contract to ensure you aren’t in violation if you take funds from another source?

Reckless stacking has become all too prevalent in the alternative finance market, making it nearly impossible for many small businesses to afford the payback amounts accrued from multiple sources. This puts small businesses on a cycle of difficult-to-escape high cost repayment terms since stacking increases the overall cost of every funded dollar.

As a successful small business, you become an easy target for many opportunistic lenders, funders, and brokers that pitch the benefits of easy capital. You may receive multiple calls a day promising easy, low risk money. But as we like to say, if it sounds too good to be true, it probably is. Don’t let your business become the next victim of high cost stacking.

Risks of Stacking

Stacking goes against the core ethics of responsible funding. It makes it challenging for small businesses to survive, and in turn, will lead to higher default rates, which will lead to increased borrowing costs for everyone in the market for working capital.

In addition, since traditional lenders tightened lending policies following the 2008 financial crisis, alternative lenders have helped fill the credit gap by providing much needed capital to small businesses—but that may change if too much irresponsible stacking occurs.

For the health of our economy and to honor the laissez faire business climate our country has thrived on, it is important for alternative lenders to fund responsibly, and for small business owners to add debt or advances responsibly.

Alternatives to Stacking

There are many opportunities to improve cash flow in your business. If you have multiple loans or advances, the first consideration should be to consolidate them into one lower payment to improve the term and interest rate. Consolidating has the potential to lower your daily, weekly, or monthly payments by 25% to 75%. Breakout Capital offers a true consolidation option to lower the heavy burden of high daily, weekly, or monthly payments.

From an operational point of view, businesses should also consider contacting their suppliers for extended payment terms. Suppliers often extend terms for long-standing customers that can include options such extending Net 30 to Net 60 and also offering pre-payment discounts.

From an accounts receivable perspective, businesses can also work with customers to collect on outstanding invoices and negotiate better terms. Following up on overdue invoices is a good place to start. For long-standing debts, some customers may welcome installment payments to clear larger A/R invoices, which will in turn help businesses with short-term cash needs.  Businesses can also consider offering early pay discounts to long-standing customers. Reworking payment terms for projects in negotiation may also help. For example, offering a 5% savings on a project if the customer pays 50% up front versus monthly installments.

Overall, it’s important to stay focused on your business plan. If your business plan indicates that additional debt or other forms of capital will support your growing business, then make sure you’re involving your CPA or other financial advisors for the safest way to address any short-term cash flow problems.

Keep Your Focus on the Long-term Financial Health of the Business

Small business owners are often so caught up in the day-to-day business obligations that they lose touch with the financial side of their own companies. By educating themselves about the risks of stacking, and involving the right partners, business owners can have a more holistic financial picture of their companies.

It is important to clearly understand how long it will take to pay back any debts or advances, and when your company will experience profitability.

Breakout is committed to responsible funding.   We believe it is better for you to keep your business and grow it responsibly than set it up to fail with insurmountable high cost capital. Please contact us today if you’d like to partner with us.