Co-financing versus loan stacking: key questions answered

Kevin Vendel examines the details behind the two types of financing

What are the functional differences between co-financing and stacking?

Co-financing is when two or more banks or other lending institutions, such as fintech companies, jointly finance a project. With loan stacking, a small business owner takes out multiple loans, so that they have independent, unsecured loans or cash advances on top of an existing finance arrangement. A key difference between co-financing and loan stacking is communication. With co-financing the client, accountant and lenders are involved in the conversation, reducing risk and lowering costs, resulting in the best package for the client; whereas with loan stacking lenders don’t interact – or even know about each other.

Why is co-financing a better option than stacking for SMEs?

Co-financing offers a solution when an SME can’t borrow all the money it needs from a bank: it’s a “one-stop shop” solution that gives the accountant room to negotiate, which ends up being more cost effective. Many small businesses have a long-term relationship with their accountant and trust the partnership the accountant has with co-financing lenders, whereas with stacking, multiple lenders are involved and may have no relationship with the accountant. The accountant doesn’t have a strong overview of the set up – this puts the client at risk, and could – in a worst-case scenario – result in the accountant losing their client.

What advantages are there for accountants in recommending co-financing to their SME clients?

By offering a broader range of finance solutions for clients, accountants add another revenue stream to their firm. SMEs are looking for one trusted financial adviser rather than a series of referrals. This “Accountant 2.0” should be able to advise on all topics related to finance. Clients will perceive this as a differentiator from other firms and will be more likely to return. The key point is always trust, in combination with good communication between the client, accountant and lenders.

What should accountants consider when they put together co-financed deals?

There are three questions to ask. First, does the client really need a co-financing solution, or can they just go for a loan of say 80% of what they need now, and apply for the final 20% later? Second, what is the total cost of the package – they need this information from both lenders. And third, most importantly, what is expected from the lenders: what service will they offer and how will they communicate?

What are the options available for co-financing for accountants to consider?

The most important distinction is whether the loan is secured or unsecured. It will either be a secured loan plus an unsecured lender, like Spotcap; or two secured lenders, such as two banks or an asset-based lender and a bank. The disadvantage of the latter is that both have a claim on the client’s assets, which can result in not even closing the deal. The benefit of an unsecured lender is that they have no claim on the assets, so they don’t have to wrangle over them with the bank or an alternative asset based lender.

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