Loan stacking is a big problem for alternative lenders (the likes of Funding Circle or Zopa) and means businesses are taking out multiple short-term loans without needing to provide security. They are applied for and taken at the same time so lenders can’t see the other applications, hence the business is ‘stacking’ loans that they wouldn’t necessarily have been granted if each lender could see all the debt being taken on.
Stacking can lead to businesses taking on too much debt which they may be unable to repay and, as a result, experiencing financial difficulties. Gary Shankland, Partner at Begbies Traynor Group, told us “in numerous liquidation cases, we see multiple loans from different alternative lenders”.
As a result of the burgeoning alternative lending market (Funding Circle has lent over £4bn), the problem is growing. Businesses who take out multiple loans are either doing it for legitimate business reasons (i.e. to grow their business) or fraudulently (i.e. to take the money and abscond).
Difficult to police
The loan stacking loophole is difficult to police. One of the key selling points of alternative lenders is speed and simplicity for the borrower; this becomes compromised if the lending process is more in-depth. As a preventative measure, some lenders may consider delaying the loan completion date at the last minute to do further due diligence. This works well in cases where suspicion exists, but seriously damages the user experience and goes against the alternative lending market’s USP.
Ultimately it is a balance for the lender between growing their loan book versus managing risk. Although not recommended, in practice, it is relatively easy for businesses to stack loans, especially if they have a clean credit history.
Gary Shankland doesn’t see a simple solution: “Unless there is a mechanism for lenders to share data on borrowers to uncover stacking, it is hard to spot without ramping up due diligence and, of course, that data is of critical commercial importance – providers probably won’t want to share.”
Here to stay
With no clear solution on the horizon, alternative lenders must continue to accept stacking as a cost of doing business in this area. However, it has created some problems for legitimate businesses:
- A business may be dealing with a client that is loan stacking, meaning they are likely to be overleveraged and far higher credit risk.
- Lending rates from alternative lenders may increase to mitigate the risk posed by stacking, leading to less attractive terms for legitimate borrowers.
- The due diligence process from alternative lenders may ramp up, again making the loan acceptance process more difficult and time-consuming for legitimate borrowers.
Action to take
It’s really important to be aware of the issue of loan stacking. The bottom line is that the alternative lending market is propping up many businesses that probably wouldn’t survive without it. Because of this, you must ensure you know who you’re working with – have a clear view of their financial health, trading performance and previous financial problems – and this will give you a clear indication of their likelihood of default.
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