Updated: Jun 26
With all of the new state commercial financing laws going into effect, something that is noticeably absent is any regulation on double funding or stacking of financing positions that merchants receive. It's a process that has changed the industry over the years to what it is today, which many feel is to its detriment.
Lawmakers, lobbyists, and other stakeholders are either not pursuing solutions in this area, are not finding policies that would help remedy this issue, or if they have they are not getting anywhere with any meaningful resolutions that could make a legal difference.
Of course, many would not be in business right now if there was no such thing as stacking allowed so they are ok with this, and I am not saying that stacking should be outlawed somehow, but the truth is something needs to be done.
The major problem is really double funding, which is the process where one funding company funds a merchant anytime from the same day to roughly 14 days after the most recent funding. (If you don't know the difference between double funding and stacking read here).
Another problem with either double funding or stacking is they are taking up too much of a percentage of the average monthly revenue from a merchant. Many will say this is for the merchant to agree to or not in a free market system.
The lack of any regulation is surprising for a few reasons.
One reason is that in many contracts for alternative financing products, specifically merchant cash advances (also referred to as revenue-based financing), there are no stacking clauses that prohibit the stacking of additional advances with penalties that range up to defaulting the merchant on the advance and asking for full repayment, however, I do not think that is enforced often. If it's never enforced and the courts can't do anything to uphold it, then it seems useless.
Although the clause is there, merchants ignore it, if they even know about it, to get more advances as needed without the knowledge of the previous funding companies.
Then business loan brokers will help them do so even if they risk their relationship and commission with a funder who they are stacking.
Another reason it's surprising is that stacking of advances is risky to the merchant and each funding company because of the increased default possibilities.
Merchants think they can afford it.
Brokers do too but also want a commission.
And funders who fund behind multiple positions don't mind as long as they recoup enough to cover their costs and profit an expected margin, which usually includes charging upfront exorbitant fees.
Many ISO agreements prohibit brokers from stacking their own deals with other funding companies.
Then even if the current advance was not done by a broker, a funding company would be furious to learn a current broker stacked one of their recent merchants and could possibly take action, like terminating the ISO agreement.
Lawmakers may have a difficult time with this because there may be no legal way of doing so given previous case law. There have been funders who have sued other funders for stacking or double funding claiming tortious interference but were unsuccessful.
I don't know of any successful lawsuits and maybe that leads to the major problem: nothing can be done given the current laws.
There will still be funders who stack and double fund with offers of 30 days, 1.50 with 10% fees, and claim they are helping small business owners as long as there are no penalties.
So will that change?
Doesn't seem like it will in the near future without any policy reform.