How to: A business partner with bad credit
Today you can pick from several loan options when you have a business partner with damaged credit. That’s good news. That partner can even be you!
An associate with a low credit score will cause challenges . Our programs are designed exactly for those situations. Apply below and get funding today.
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FAQ Frequently asked questions on getting a business loan with a partner with bad credit
Question: Can we get a loan if my business partner has bad credit?
Answer: Search for lenders that offer programs specifically for business partners with bad personal credit and low bureau scores. Ask about approval requirements in advance, including a minimum credit score.
Question: What can we do after being denied a business loan for my partner’s low credit scores?
Answer: One option is to lower their ownership percentage at the secretary of state to below 20%. Some lenders won’t require them on the application or decline for derogatory trade lines if their shareholder percentage is very low. Another option is to remove them entirely as owner of the business.
Question: Should we try to fix my business partner’s credit instead of taking them off the business altogether?
Answer: Work on improving the bureau first if there is enough time. They can be lowered to 5% ownership or less and avoid being reviewed by many lenders.
How a bad credit partner negatively affects a business
Getting approved with a low credit score partner.
Options are more limited when applying for financing with a partner that has derogatory personal credit. Lenders may decline when the ownership split goes over 20%
Some funders will not pull a bureau if the shareholder percentage is less that 20%. If the percentage is less than 5% or 10%, more lenders will not look at the information of those owners. If the business partner with a derogatory file has close to 50% interest, then chances are much higher the request will be declined. This is especially true with more traditional lenders like banks and the SBA.
Once the company has taken care of the financing needed, the owners can consider longer term programs for derogatory history. Should an owner with bad credit fix it or wait it out?
Getting a business location
Renting a location
Once a commercial location is found, the company owner’s credit is looked at. Landlords will pull a bureau.
Damaged credit may cause a rental request denial. Discuss this with the landlord. If the other owner has a very good file, the landlord may approve the rental request and lease the property.
Buying a location
If your company wants to finance the purchase of a location through a commercial mortgage, the lenders will also look at all the owner’s credit. The level of scrutiny will be higher than with a rental request, including full financial information.
Establishing business trade accounts
Many companies establish trade accounts. Companies check the business and personal credit of the main owners when a trade account is applied for. Significant negatives in the file may be a reason for denial. Not being able to secure important trade accounts can be very damaging and cause the business to be short of the inventory, equipment and other critical needs.
Even if the business can secure the trade accounts it needs, the terms may be more expensive because of the partner with bad history. This will translate to increased costs to operate.
Obtaining Government and Private contracts
When a business bids on private or government contracts, the personal credit of the owners is reviewed. If there is a business owner with a severely damaged bureau, it will be more difficult to secure these contracts. The contract request may even be denied for this reason.
There are many reasons why a background check for a business loan may be completed on the owners. Some of the reasons have already been listed. If a background check is requested, it will include a bureau. Bad trade account history on any of the owners may be a reason for denial in a background check.
A number of negative consequences of having a business owner with bad credit can be fixed. The problem can be reduced or improved upon.
Change in ownership percentage
The biggest change that can be made is lowering the ratio of ownership of the partner with bad credit. They may not agree to this. Lowering it to less than 20% should prevent declines and less than 10% would be even safer. A split of less than 5% would eliminate the problem in most cases.
Lowering their stakeholder proportion will not be popular with many of these owners. A remedy to this is to consider other changes in the bylaws of the corporation. There are many options including issuing company stock. A higher salary and a commission structure can be added or increased. Another compensation is to pay more towards their IRA. All of these actions are ways to balance reducing the ownership ratio of an existing partner with low credit scores.
Change articles of incorporation
If the partner with hurt credit agrees to lowering their stakeholder amount, the Articles of Incorporation should be changed to reflect this. Many States show ownership breakdown in the Articles of Incorporation. After the Articles of Incorporation are updated to reflect the new percentages, they should be submitted to the Secretary of State.
Updating the Secretary of State
Update the Secretary of State listing which lists information on the company. Remove the owner with bad credit, or lower their percentage. List the owner with better file as the main owner.
Update business credit reports
Review and update company reports. This includes Dun & Bradstreet and Experian commercial report. There is a section listing the owner’s name. This should be the owner with the stronger bureau.
If further assistance is needed, the SBA has excellent resources.