Getting a Loan When Your Business Partner has Bad Credit

25 Aug, 2016 / Comments: Comments Off on Getting a Loan When Your Business Partner has Bad Credit / By

Choosing the right business partner can make or break your business. Not only do you want someone that is dependable and invested in the business, you want someone that has good credit so your company can continue to grow. Unfortunately, this is not always the case; it is kind of like having your cake and eating it too. If you found the best business partner because of his business knowledge and expertise, but his credit is far from perfect, there are ways to still get the loans you need without having to buy your partner out.


Start Building Business Credit

There is a difference between business credit and personal credit and not every lender will care about both. If you are in need of a business loan, start looking in less than obvious places for that loan. Don’t call on the large, big-name lenders; instead, call on private investors that make their own rules regarding who they will lend money to. These private investors do not always care about personal credit scores, giving you the loan based on your business related attributes. Once you obtain business funding, make sure your payments are on time and that you handle the money responsibly in order to build up your business credit score so that personal scores do not matter.


Take Larger Ownership

If your business partner’s credit is going to hinder your ability to get business funding, consider lowering his ownership to less than 20 percent. That is the threshold that most banks have in regards to whose credit impacts the ability to obtain a business loan. If your partner with bad credit owns 19% of the business, his credit score will not matter as much for the business loans, enhancing your ability to get approved for the funds that you need.


Work on his Personal Credit

Even if you take the above steps, it is important for your business partner to work on his personal credit as it could impact your business down the road. He can start by making his payments on time, lowering the amount of outstanding credit, and avoiding applying for any new credit in the near future. As he starts to repair his credit, the score will increase. This change will not happen overnight; however, so it is important to start this step early on in the process so that when the time comes that you need the business loan and his credit to qualify for it, the score that you need will be there.


Use Trade Credit

If you cannot find a private investor or you cannot qualify for a business loan on your own, consider trade credit. This method enables you to obtain the materials and/or products you need while paying the vendor back individually. You are not taking out a loan, but are rather signing an agreement with a fellow business to pay them on a regular basis. Remember that trade credit does not normally report to the credit bureaus, but if you ask the vendor to report it for you in order to increase your business credit score, most are willing to do so.


Obtaining a business loan despite your partner’s bad credit is not impossible, it just may require a little creativity. If you are not comfortable funding everything on your own, help your partner work on his personal credit while you build up your business credit score at the same time. This will give you plenty of back-up when you are in need of funds and have lenders that are interested in both personal and business credit scores in order to get you approved.


William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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