03 Mar Loan Loading: Should Your Business Take On Multiple Loans?

Once you’ve secured your first business loan, depending on your businesses cycle, is it worth taking on another loan? i.e. “Loan Loading” Or do you need to evaluate the real commercial benefit from taking on further funds with additional costs?

I had a conversation with a Loandesk user recently that wanted to take on an invoice factoring facility and an unsecured business loan at the same time. When quizzed as to why he needed both, his answer was “I would like to have the funds in my account incase I need them”. What? Clearly this does not make sense, you’re willing to cut into your profits with a fixed term loan simply because you like the idea of having the funds on account. The factoring facility offered was a pay-as-you-go arrangement, meaning he would only pay for funds, as he needed them. With the fixed term loan, the full amount is borrowed from day one and repayments need to be made weekly or monthly.

Obviously the above example doesn’t apply to all businesses, however it should make you think why and how you will use loan facilities and ensuring you’re putting in place the correct ones that match your situation or opportunities.

We’ve listed a few questions you should ask yourself before deciding whether or not you should load your loan facilities.

How will you use the money?

How you use the money needs to be carefully thought out, are you investing it in stock, paying wages or catching up on tax debts? Or maybe if you just had a few more employees you’d be able to scale your business to take on new business.

On the downside, would you use the loan to pay creditors or solve an operational loss? If it feels like you need a cash injection for life support then you may want to rethink taking out a second loan at this time as it could potentially place you in a worse position.

How’s your business growth?

Is your business growing rapidly? Does it feel that you’re constantly fulfilling orders, keeping payments up to date and increasing your customer base? Is your account as healthy as it’s ever been? Then you may be a candidate for a traditional business loan.

On the other hand, if you are struggling financially and already have one loan, then careful consideration needs to be given to taking a new loan if it’s not to generate new revenue to make repayments and generate new profits.

Did your first loan have favorable terms?

Do you know if your first loan facility would work alongside a second loan? If it’s a bank loan in place, will the bank release or allow other lenders to finance behind them? If the interest rates are low, the payments are comfortable and you haven’t already used all of your assets as collateral, then terms would be considered favorable.

That said, if you’ve already leveraged your assets or are paying high amount of interest then conditions may not be so favorable for an additional bank loan or other lender to consider giving you an additional loan as your servicing ratios may not suit a lot of loans in the market. That said there are other asset classes such as receivables that lenders will provide working capital against.

Should you really take that second loan?

If your business is showing growth and you know that adding capital now will result in increased revenue gains, then it might be time to load your loans.

If, on the other hand, you need cash to fix a serious problem or dig yourself out of a hole, then loading loans may not be your best bet.

There are other funding options out there aside from a loan. Don’t discount anything from factoring invoices to taking on investors to really outside-the-box methods of fundraising such as crowd funding. You can also seek angels investors and given improved conditions once the business is back on it’s feet, you’ll be in a position to apply for a low rate loan again from a bank or alternative lending source.

Had any experience borrowing from two sources? A common one is an overdraft and an invoice factoring facility together.

About Leigh Dunsford

I am a small business finance & lending columnist at Loandesk, teaching entrepreneurs what loan options are available to them in Australia, explaining the differences between each loan type & how to position themselves for the best chance of getting approved for their perfect loan. My thoughts have been published on Startupsmart, CEO Magazine, Smartcompany & more...

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