Even if you have a promising app, a genius invention, or a breakthrough solution, you won’t get very far without sufficient funds. The need for money may make you frantic, but if you have your ducks in a row, you have a good chance at being able to borrow the money you need to get started from banks or business lenders.
If you’re splitting the workload with a partner, you may wonder if it’s easier to get financing for your business if you have a cofounder or go it alone? After all, having another person who feels connected and enthusiastic about the future success of your pursuit is definitely encouraging. But when it comes to borrowing money from financial institutions, does having a business partner help or hurt?
When does having a business partner become detrimental for financing?
When applying for loans from financial institutions both your personal credit score and your partner’s will be checked as part of the assessment process. We’re talking about money here, so of course, these banks or lenders want some guarantee that you and your business partner have a good history of repaying your debts. They also need to minimize their risks of not getting their money back. Generally, lenders will need to run a personal credit check on anyone who holds 20% shares in the company.
If you’re confident that your personal credit score is great, you’ll want ensure you can have the same confidence in your business partner’s score. If any of your partners’ scores are poor, it could seriously affect your chances of getting a loan.
Another factor that lenders will check is each partner’s debt-to-income ratio, also known as your debt servicing ratio (DSR). This is the amount of your monthly income versus the amount of debts you need to pay from the income. If your partner has an excessively high DSR ratio (anything over 43% according to Investopedia), lenders will feel that he or she is not in the position to pay back an additional loan which lowers the business’s chance of getting financing approval.
What can you do to fix the problem?
If run into either of these issues, there are a few things you can do to improve your chances of getting financed.
1. Help your business partner improve their credit score/lower debt servicing ratio (DSR).
If your business partner has a poor credit score and/or a high DSR ratio, it may seem that his situation is a burden to your business. But if you know that he’s still a valuable asset for other aspects of the business, then you should consider helping him improve his financial ratings. Become his accountability guide and check to make sure he’s making payments on time, cutting unnecessary expenses, paying off debts, etc. Try applying for a financing loan again after his financial status improves.
2. Get a joint guarantor with a great credit score.
A guarantor is a third party who promises to take on the liability of the loan if you were to default. This can increase your chances of getting a loan, especially if your guarantor has an impeccable financial record by offsetting the negative borrowing history of your business partner.
A guarantor is usually a family member or someone connected to the business. This eases the lender’s concerns that there are enough people who will be responsible for making sure that the loan is paid off on schedule
3. Buy out your business partner.
You can also consider buying your partner out of the business if you have the means to do so. If there’s a buyout agreement in place in your initial contract with this partner, then the process should be easy to facilitate with your accountant. Take note that buying out equity shares can often be a sensitive issue, so you’ll need to discuss this thoroughly with your partner.
If there are no clear buyout terms in your contract, it’s worth enlisting help from a lawyer as well. Once the buyout process is complete, you can then transfer ownership to another partner with a great credit score and DSR to ensure your loan application gets approved.
The Bottom Line
Even if you have a good credit score and a low DSR, a business partner who doesn’t can adversely impact your chances for approval. This situation might be challenging, but there are ways to handle it so you can get the financing you need. It doesn’t have to ruin your relationship with this partner or your chances of starting the business of your dreams!