When lenders approve a business loans to small business owners regardless of the existence of primary loans, this is called layered funding or piggy-back funding.
Even if it’s not through the same lender, is the lien at stake here a subordinate one? The answer is yes.
Is this a smart move for a business? There are many reasons why this is, most probably, not the best move businesses can make:
1. Cost to capital ratio is more anything but cheap. Most businesses will probably take this as the last resort.
2. Short term of no more than 6 months.
3. There are excessive punitive fees.
One hidden aspect of layered funding that is not being recognized is the fact that it jeopardizes the relationship for renewal or refinancing opportunities. A prospective lender considers this a breach of contract which could potentially cause the loan to be recalled early, not to mention, it inhibits the business’ ability to repay the initial loan, and the cash flow and debt ratio levels that a business must maintain to qualify for quality loan.
Layered funding is the worst form of bridge loan a small business owner can possible obtain for their business.
Not just that the cost of money is high, but the fees are very expensive too. This is worse than the all-pervasive Pay Day loan. There is this ploy that additional funding will help small business owners save their business, this is far from the truth as it will just jeopardize their access to future business funding.
Lenders will tend to to lend to merchants with secondary loans on the books. We don’t recommend layered funding to anyone, especially if you have a loan or business cash advance. Many businesses will not be able to survive the additional loan and consequent additional rates and fees.
Buying UCC filing lists is one of the layered funding lenders tactic. Lenders, typically, file UCC recordings with the borrower’s Secretary of State. UCC filing is becoming publicly available after lending to small businesses. Lenders and brokers buy these UCC lists from Dun & Bradstreet, Experian and others so that they know that a primary loan is in place before offering layered funding. This list can be very informative to secondary funders because they know that merchants have taken some sort of capital from other sources. Because of this information they can sell additional funding to a small business regardless to any current contract merchant might have with a bank or alternative funding source.
These lenders do not disclose full information about the potential harmful effect the layered funding might have on the businesses and they are not informing the borrowers about how other lenders will react to the layered funding of the business.
When being targeted by these layered funding brokers/lenders, one must think twice before accepting additional working capital. Will this jeopardize my current relationship with my present capital provider? Is the lenders sole benefit the only reason for this offer?
If you currently have a loan that is being deducted ACH from your account like an auto pay, and you add another layer of ACH or another auto payment deduction due to additional working capital funding, this could cause a major shortage of cash for operating expenses. This is one reason traditional lenders do not permit such funding because it can adversely affect business revenue. The fact that money obtained this way does not come cheaply, the fact that it must be paid back quickly, puts a strain on the cash flow of the business.
When all of the businesses revenue goes on financial obligations, loan payments, there will be nothing left for daily business operation. Under these circumstances you may end up closing your doors for lack of working capital or lack of capital infusion.
Should business owners take the plunge in a last ditch effort when no other funds are available? Not necessarily when the risks outweigh the benefits. For more information on how layered funding can affect your business, please contact Liberty Capital to find out how to avoid this harmful trend in business lending and get.
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