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• 08 Oct

  When Multiple Business Loans Become A Problem

  Accumulating business loans? How many business loans or credit facilities can a company take on before the combined borrowing becomes a problem?

  This is a question worth asking after our recent review of publicly available Companies House filings for a UK company entering a proposed liquidation process.

  The company's statement of affairs showed a substantial deficiency, together with outstanding amounts owed to numerous creditors that we recognised as providers of business loans and alternative credit facilities.

  What caught our attention was not simply the amount owed, but the number of different finance providers involved. The borrowing appeared spread across several lenders, rather than dominated by one large facility. Some arrangements were secured, while others appeared among the company's broader creditor obligations.

  It raises an interesting question about the availability of business credit and the potential risks of accumulating multiple facilities.

  A Real Example Of Multiple Business Credit Facilities

  Publicly filed information does not explain why the company encountered financial difficulties. Nor does it say when the company arranged each facility, how it used the money, what the lenders knew about other commitments, or whether the borrowing contributed to the eventual financial problems. Nevertheless, the number of recognisable finance providers appearing in the creditor information was striking.

  The company's previous filings also recorded secured finance arrangements with different providers over time. We cannot establish whether all the facilities were outstanding simultaneously throughout the company's trading history. However, the statement of affairs suggests that a considerable number of business credit obligations remained at the point of the proposed liquidation. This illustrates an important issue that deserves wider consideration.

  Even when individual lending decisions seem reasonable, multiple borrowing arrangements can create a very different financial position.

  What Is Business Loan Stacking?

  Business loan stacking generally refers to a company taking out additional loans while existing borrowing remains outstanding. For example, a business might arrange an initial loan to support working capital. Some months later, it takes another loan, perhaps followed by a revolving credit facility or another form of alternative business funding.

  Over time, the company may have several financial commitments operating alongside one another. There is nothing inherently wrong with this. Many successful businesses use multiple funding arrangements for legitimate commercial purposes. However, difficulties can arise if a business repeatedly borrows to cover an underlying cash flow shortage without addressing its cause.

  We have previously examined this in our article Loan Stacking And Alternatives To Business Loans.

  The recent company example raises a related question: how much credit can a business accumulate across multiple providers?

  How Do Lenders Assess Existing Borrowing?

  Business lenders use different methods to assess applications. Depending on the provider and product, these can include bank transaction analysis, turnover, profitability, credit searches, financial accounts, existing commitments, available security and forecasts. Some lenders use automated systems that can produce decisions relatively quickly. Others undertake more extensive assessments.

  The interesting question is how effectively these processes capture the cumulative burden of borrowing from multiple sources. For example, a business might appear able to service a new loan when viewed against its turnover and recent bank transactions. But what happens if it already has several other facilities, each requiring repayments?

  Were all those commitments identified? Were they considered in the affordability assessment? Could the lender see the full picture of the company's financial obligations? These are questions, not allegations about any particular finance provider. We do not know how the lenders in the case described above assessed their applications or what information they had. Each lender may have conducted appropriate checks based on the information available at the time. The wider concern is whether businesses can sometimes accumulate borrowing that becomes difficult to sustain, even though the individual facilities appeared affordable when originally arranged.

  Why Businesses May Keep Taking Additional Credit

  Businesses may have many legitimate reasons to arrange more than one business finance facility. A company might use one loan to buy equipment, another to finance expansion, and a separate facility for working capital. The difficulty arises when borrowing becomes a recurring response to an ongoing cash shortage.

  Consider a business that sells to other companies on credit. It may be profitable, but substantial amounts of money are continually tied up in unpaid customer invoices. A business loan can provide an immediate cash injection. However, the company must normally repay the capital over an agreed period, along with interest and charges.

  As the company makes those repayments, it may find its underlying working capital requirement has not disappeared. Another loan might provide temporary relief, but it also introduces further repayment commitments. This is one way that loan stacking can develop.

  The question is whether the business needs more borrowed money or a different way to finance its ongoing trading cycle.

  Why Invoice Finance Can Seem More Difficult

  We've found another aspect particularly interesting in our experience as business finance brokers. Businesses seeking finance sometimes see invoice finance as more complicated than taking out a business loan.

  Depending on the provider and facility, arranging invoice finance can involve examining the sales ledger, customer payment histories, debtor concentration, contractual arrangements, existing security and other aspects of the business. There may also be ongoing reporting requirements and checks on the invoices being financed.

  By comparison, some business lending products offer relatively straightforward applications, automated assessments and rapid decisions. This can create an interesting contrast.

  A business might find it relatively easy to arrange several separate borrowing facilities, yet see the checks involved in setting up one invoice finance facility as unnecessarily complicated.

  Of course, this comparison isn't universal. Some business lenders undertake extensive due diligence, while some invoice finance providers offer simplified application processes. Nevertheless, it raises a worthwhile question: can the convenience of extra credit distract businesses from choosing the most appropriate long-term funding structure?

  Could Invoice Finance Be A Better Alternative?

  Invoice finance works differently from a conventional business loan, and it may not have even been appropriate in this particular case. Rather than providing a fixed borrowing amount that is gradually repaid, invoice finance releases funding against eligible outstanding customer invoices. As customers pay, the associated funding is cleared, while newly raised invoices can generate additional funding.

  For businesses with substantial credit sales, this can provide a revolving source of working capital linked to their sales ledger. Importantly, the facility may also increase as eligible sales and outstanding invoices grow, subject to the provider's funding limits and other conditions. This does not mean invoice finance is always preferable to a business loan.

  It can be unsuitable for some businesses, and it does not resolve underlying losses, poor profitability or an unsustainable business model. It also involves costs, conditions, and potential liabilities that you need to understand.

  However, if the underlying requirement keeps recurring because customers take time to pay, invoice finance may be worth considering before arranging another loan. Businesses can also use invoice finance alongside existing borrowing, provided the lenders and security arrangements permit it.

  We explain this further in Can You Have Invoice Finance If You Already Have A Business Loan.

  Is The Availability Of Business Credit Part Of The Problem?

  The growth of alternative business lending has provided companies with access to a wider range of funding products. That is generally a positive development. Businesses benefit from alternatives to traditional bank borrowing, particularly when they need funding quickly or have requirements conventional lenders cannot accommodate. FundInvoice works with providers offering both conventional and alternative business finance.

  However, greater credit availability also makes it important for business owners to understand their total financial commitments. A facility that looks affordable in isolation may be less attractive when combined with several other borrowing arrangements.

  There is also a difference between being eligible for additional credit and deciding whether taking that credit is commercially sensible. Just because another lender is prepared to advance money does not necessarily mean that further borrowing is the right answer.

  What Businesses Should Consider Before Taking Another Loan

  Before arranging additional borrowing, business owners should consider the purpose of the funding and whether it addresses a temporary or recurring requirement.

  In particular:

  • How much borrowing is already outstanding across all providers?
  • What are the combined monthly or weekly repayment commitments?
  • Will the new funding generate additional income, or will it simply replace cash used to repay existing facilities?
  • Is the requirement genuinely temporary, or does it arise repeatedly?
  • Could another type of finance better match the underlying cash flow cycle?

  These questions do not mean businesses should avoid loans. A well-structured business loan can be an entirely appropriate solution. The objective should be to ensure the type, amount, and repayment structure of the finance match the company's actual requirements and its ability to service that debt.

  The Lesson From This Company Case

  We cannot conclude that loan stacking caused the financial difficulties the company described at the beginning of this article experienced. Its problems may have arisen for entirely different reasons. The borrowing may have responded to those problems rather than caused them.

  However, the presence of numerous recognisable business finance providers among its creditors illustrates how complicated a company's borrowing arrangements can become. It also raises a broader question: does the ease of obtaining additional credit encourage businesses to keep borrowing rather than reconsider how they structure the financing of their operations?

  For businesses repeatedly seeking working capital, the answer may not always be another loan. Sometimes it is worth reviewing the entire funding structure before adding another financial commitment.

  Review Your Business Finance Options

  At FundInvoice, we help UK businesses compare funding options, including secured and unsecured business loans, revolving facilities and invoice finance.

  If your business already has one or more loans and needs additional working capital, we can help you explore whether another loan or a different funding arrangement might be more appropriate.

  Call 03330 113622 to discuss your requirements and request a free quotation search.

  By Glenn Blackman