Around 28% of Americans have fair or poor credit — so it’s not uncommon for someone to have less-than-perfect credit. However, a business partner with bad credit can present some challenges to your small business. It can make it more difficult to do things such as secure financing from lenders and open new business tradelines with vendors.
Navigating these hurdles can strain your business and your relationship with your business partner. So what can you do when your business partner has bad credit?
Let’s explore what some of the options are and how you can be proactive about protecting your business and personal finances.
What to Consider if Business Partner Has Bad Credit
Transfer ownership or adjust ownership percentages
One solution might be to restructure the ownership arrangements within your business. Most financial institutions require information from anyone who owns 20% or more of the business. So when you apply for business funding, your business partners’ credit may mean you won’t get approved.
Your business partner might consider selling their ownership to you or another trusted person (such as a third partner). You may also be able to make your business partner an employee (or contractor) instead of an owner, and by tying their compensation to performance or other metrics, they can get paid like an owner. Keep in mind, they might be able to buy their shares back in the future if their credit score improves.
Build business credit
Building strong business credit can take some of the pressure off the business owners’ individual scores. When you’re applying for business financing, such as business credit cards or a small business loan, the lender may check your business credit or your personal credit. If your business has a good credit history, the lender may be more lenient when it comes to the personal scores.
This is because a good business credit score shows that your business finances are well managed. Here are a few ways you can build good credit for your business.
- Open a business credit file.
- Establish business credit history by opening accounts with vendors, suppliers or lenders.
- Ensure timely repayments.
- Monitor your credit report from the major business credit bureaus.
Build your business partner’s personal credit score
Building your partner’s creditworthiness is a long-term solution that can benefit both them and your business. A strong personal credit score not only improves their financial health but can help your small business get more favorable financing terms, better deals from vendors and lower insurance rates.
Rebuilding personal credit can include things like:
- A debt management plan.
- Budgeting to ensure timely repayments.
- Credit counseling.
- Monitoring credit reports.
- Building an emergency fund.
Can We Get a Loan if My Business Partner Has Bad Credit?
Yes, it is often possible to get approved for a loan even if your business partner has a low credit score. Research alternative lenders, such as online lenders, to see if they have options that fit your needs. Many traditional lenders, like banks, have strict eligibility standards you must meet to qualify for business financing. They may have a high minimum credit score standard, require personal guarantees from the owners, require collateral and more.
On the other hand, alternative lenders may have broader eligibility requirements.
Alternative lenders often put more emphasis on things like time in business and yearly revenue, instead of the borrower having perfect credit. Almost all lenders conduct some type of credit check — true “no credit check loans” are rare. However, there are a number of alternative financing options available to small business owners with less-than-perfect credit.
| Type of Financing | What is it? |
| Business Line of Credit | A business line of credit is a form of revolving credit. It allows you to draw funds from a set credit limit when you need them. As you repay the funds become available again. |
| Business Term Loan | A business term loan is a short-term loan where you’ll receive a lump sum of cash up front and repay it over a set period of time. |
| Merchant Cash Advance | A merchant cash advance isn’t really a loan. Instead, you sell a portion of your future credit card sales in exchange for cash in hand now. |
| Invoice Factoring | Invoice factoring is similar to a merchant cash advance in that you’re selling a portion of your future revenue. However, instead of selling future credit card sales, you’ll sell your unpaid invoices. |
| Crowdfunding | Crowdfunding involves leveraging your social network to raise funds for your business. It’s often done through an online platform. Individual contributors will donate or invest money, often in exchange for some type of perk like premier membership or early access. This is a common funding strategy for startups. |
Does My Business Partner’s Credit Score Affect Mine?
Your business partner’s credit score doesn’t have an impact on your personal credit score. However, it can affect your business. Lenders will consider the financial situation of all owners. So, even if you have excellent credit, your partner’s low credit could mean you’ll have higher interest rates and less favorable terms.
Can My Partner’s Creditors Pursue Our Business Assets?
Whether or not creditors can pursue your business assets depends largely on the legal structure and operation of your business. For sole proprietors or general partnerships, creditors can sometimes pursue business assets. However, if your business is structured in a way that makes it a separate legal entity, such as an LLC or corporation, its assets are generally protected with proper operations.
DISCLAIMER: This content is for informational purposes only. OnDeck and its affiliates do not provide financial, legal, tax or accounting advice.
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