The Stacking Spiral of Death
Businesses often find themselves in the position of needing capital – for expansion, inventory or emergency repairs – with little time to apply for a traditional small business loan. In those moments, an MCA can help keep a business afloat. However, that once golden goose of an MCA can turn into an albatross around the neck of the business if you get into the practice of stacking loans without due diligence and proper consideration.
As the name implies, “stacking” MCAs means adding one or more advances on top of an existing loan. In theory this practice may seem like a great idea. For example, you wanted to borrow $100,000 for the new inventory and expansion for your business but based on your profile and profits, the MCA provider agreed to lend you $75,000. You then receive one or two more offers to cover the difference and you’re ready to sign on the dotted line. Go big or go home, right? But before you sign, here’s some things to consider:
Lender Beware: Some brokers are in the business of making money and as such will make you all sorts of promises or cut corners to secure your business. Be wary of a broker who guarantees funding, often same day, if you:
Omit your existing loan from the paperwork.
Report higher daily profits than you actually make.
These actions are a clear indication that you do not actually qualify for the additional MCA and it can lead to trouble down the road.
Can you afford to stack? Businesses often use MCAs to not only survive but also to thrive. If you’re already repaying a loan, you must ask yourself: can you really afford to stack, to simultaneously repay multiple loans?
Allocating more of your profits to loans means less money towards your normal operating costs. While that may seem doable in the short run, over time it can put stress on your business, forcing you to scale back or even close altogether.
So, does that mean that a business should never consider stacking? Not at all. Some businesses can afford to go the route of a stacking strategy that will provide an influx of cash to allow them to grow by leaps and bounds. When considering stacking loans, a good rule of thumb is to never have more than 20% of your revenue in MCAs. You will then be left with a nice cushion to cover normal operating expenses as well as plan future business investments.