Should You Take Out a Second Business Loan?

Taking out a second loan for your business may sound intimidating, but there are several situations that can make it downright advantageous for your business. Whether you need additional funds to cover an emergency or keep product on the shelves, a second business loan can help.

But be warned-sometimes it's not the best option, and other times it's not even an option at all. Not all lenders will allow you to have multiple loans at once-and paying off debt with debt can be a dangerous spiral.

Debt is a powerful tool, but it's also risky. It's important to know what you're getting yourself into before you sign the dotted line on additional financing.

Below, we'll walk you through why a second loan can help and when it makes sense to use one.

Why Would You Want a Second Loan?

First, think about why you need a second loan. Did your first lender provide you with fewer funds than you needed, or did a unique opportunity suddenly emerge? Is your cash flow hurting, or are you behind on other monthly payments?

A second loan isn't always the best answer to every business problem. Sometimes, it's better to boost revenue, cut expenses, or refinance your existing loan.

However, there are a few occasions when a second business loan could be the right solution:

• You need complementary financing: Expenses are an expected part of any business: you have real estate, equipment, payroll, and much more. You typically don't want multiple loans for the same purpose, but it's not a bad idea to have loans for complementary purposes. Different loan purposes often use varying collateral and terms, allowing you to stack loans with less risk.
• Financing now will lead to more business: It takes money to make money. If your loan will generate more business in the near future, then it'll likely pay for itself-and that makes it less risky for your business.
• You need financing to maintain growth: You never want to stop your business's momentum. If business is booming and growing faster than you can keep up with, you may need a second loan to help you catch up.

That said, it's important to remember that fighting debt with debt can be dangerous. If you've fallen behind on other monthly payments and need additional funds to help get you out of a bind, it's better to look elsewhere. Consider cutting non-essential expenses or refinancing your current debt rather than looking for a second loan.

Is a Second Loan an Option?

Sometimes, a second loan isn't even an option. Many lenders prevent customers from taking out multiple business loans at a time. They do this for a few reasons:

• Collateral: You typically can't use the same piece of collateral on two separate loans. If you've already tied up your available collateral on your first loan, you might not have any left for a second.
• Risk: Another loan means taking on another monthly payment, which increases your risk of defaulting on one or both loans. Lenders don't like those odds.
• Interest rates: If your current financing doesn't require collateral, then it's likely a high-interest loan like a merchant cash advance (MCA). Multiple MCAs are a red flag for lenders because they're often associated with financial instability.

Talk to your lender to review your options. If you have consistent revenue, a stellar credit score, and business plans for increased sales, then you may be able to convince them you grant you additional financing.

Also, consider different types of financing. If you already have a term loan, consider a business line of credit or a business credit card. Or, if you're purchasing a new piece of equipment, consider getting equipment financing rather than another business term loan-diversifying your loan types can increase your odds of approval.

4 Financing Options That Make Sense as Second Loans

1. Merchant cash advance

A merchant cash advance is different than a traditional loan. With an MCA, you're essentially trading tomorrow's earnings for cash today. You'll get a lump sum of money that you'll then repay using a percentage of your daily sales.

Your sales success determines your MCA payments, so lenders are usually more confident you'll be able to repay what you owe. Plus, MCAs typically don't require collateral. If you already have a loan but need access to immediate cash, it may be your best option. 

However, keep in mind that MCAs aren't the most affordable financing choice. You're trading money for speed.

2. Invoice factoring

Invoice factoring (or accounts receivable financing) is a way to sell your outstanding invoices for immediate capital. If your customers are notoriously late or falling behind on their payments, you can turn to an invoice factoring company to essentially buy up your IOUs at a discount.

Lenders don't require collateral for invoice factoring (since the invoices typically act as collateral), so it can be easier to get this financing as a second loan option. You could use these funds to improve your cash flow or pay off other loans.

Keep in mind that invoice factoring isn't giving you new money-it's empowering you to get what you're owed quicker. However, the invoice factoring company takes a percentage of the funds as payment for their services, so only use invoice factoring if less money now is worth more than more money later.

3. Equipment financing

Equipment financing lets you borrow funds to finance everything from a backhoe to software to a brand-new POS system. Unlike most loans, equipment financing typically doesn't require your business's collateral or a personal guarantee-the equipment you're funding serves as the collateral.

If you need additional equipment to accelerate sales or keep up with demand, equipment financing can make it happen. Lenders see loans that directly increase revenue as less risky-and that's usually what your financed equipment will do.

4. Business line of credit

A business line of credit isn't technically a loan-it's a revolving credit line that boosts your working capital and gives you access to additional funds. A line of credit can help you out when disaster strikes or when your customers fail to pay on time-you can just cover the crisis with your credit instead of applying for emergency financing.

Plus, you only pay interest on the funds you borrow (not the entirety of your credit line). That means you'll have no monthly payments if you never use the line of credit, making it an incredibly versatile financing tool. 

If you can pay back the balance in full, you won't have any interest payments-and if you can't pay it off immediately, then you'll have time to break down your balance into monthly payments. This flexibility can protect your business from accumulating uncontrollable debt. 

It's important to be thoughtful if you're considering taking out a second loan-be sure you're aware of all the factors before you act. However, if you're ready to apply for a second loan, start your application now to find out what additional financing might do for your business.