Many businesses get started with more than one founder. In fact, having a partner to help get your business up and running is a great thing. You can brainstorm together, bounce ideas off of one another, and if you have skills that complement each other, you have more strengths from which to draw when making important decisions.
Choosing not to go it alone is hugely beneficial, and highly recommended. But when the need for financing arises, be careful who you team up with. A business partner can hinder your ability to get approved for a loan. A low credit score and low income can hurt more than you know.
Don’t fret. There are some things you need to be aware of, and there are steps you can take to improve your chances of getting financing. Read on, sojourner of entrepreneurship!
The Twenty Percent Rule
Most lenders check credit history and income levels. That’s a no-brainer. But did you know that they only want to check the credit history and income level of anyone who owns twenty percent (or more) of the business?
No matter who fills out the paperwork or signs the agreement, a partner with bad credit and low income can bring your approval process to a screeching halt. A minimum credit score requirement applies to everyone who owns at least twenty percent of the business, so your excellent credit score can’t make up for your partner’s poor credit history.
Income is no different. When it comes to debt-to-income ratio requirements, every person who owns at least twenty percent of the business has to measure up. To find your debt-to-income ratio, divide your annual debt payments by your annual income. Most lenders require at least forty percent.
There are steps you can take to improve your chances of getting approved, and no, you don’t have to ditch your partner to do it.
Improving your partner’s personal credit is the easiest way to better your chances of getting a loan. Take the time to help your partner pay bills on time, pay down debt, and reduce their use of credit cards. It pays off, in the long run, both personally and professionally to encourage good spending habits, especially if this person owns a large portion of the business!
Devote the time your partner spends improving his or her credit to strengthening your business plan or expanding your knowledge of the industry. There are plenty of things you can do in the meantime to better position yourselves to enter into the competitive market.
The Impact Of Credit
Your business credit score is independent of your individual scores, so you and your partner can both work toward qualifying the business for a loan on its own terms. If you have a good commercial credit score tied to your business’s activity, then it’s less related to the credit scores of the owners. Pay your suppliers on time, open and use a business checking account, or apply for and use a business credit card.
You may choose to transfer more ownership to the partner with better credit or a higher income. If you don’t want to deal with bad credit, transferring majority ownership removes the other partner from consideration when applying for funding.
You can transfer ownership quickly if you have a buyout agreement and the other partner can afford to buy out the shares. Use the help of an attorney or accountant to make sure you protect yourselves.
The last thing you may choose to consider is using a co-signer. You can avoid the trouble of bad credit by using a relative to co-sign on the loan. You can improve your chances of getting financing by going this route, but it also has its disadvantages. It puts a lot of pressure on the co-signer and may make you feel more obligation for your business to succeed.
Apply For Funding
When applying for a business loan, it’s important to consider your partner’s position in the company. You may need to research small business loans for poor credit and unsecured business loans. Your partner’s credit score could help or hurt you, so be aware of your options.
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