How Small Percentage Owners Can Still Get a Business LoanTyler Sousa
Running a business is far from a one-man job. Businesses have many moving parts, and staying on top of all of them on your own can be an overwhelming task. For this reason, many companies are not owned and operated by just one person, but more often two or more.
Divvying up the responsibilities that come with running a successful small business is a common practice. For the most part, these partnerships result in a positive experience.
There aren’t many negative connotations associated with partnerships, but there are a few unique obstacles that come with sharing a business.
Banks Say Size Matters
Getting a bank loan as a small business owner can be challenging enough on its own, but the bigger the percentage each partner owns the more complicated things get.
When a bank sees that a business has more than one partner with 20% ownership, they will require all partners with 20% percentage or higher sign a personal guarantee just to qualify for a loan.
The need for a personal guarantee from each owner is for the safety of the bank, who already feels like they are taking a substantial risk by working with a small business.
With multiple owners, the risk is heightened due to a variable increase in one of the owners defaulting on their financial obligations.
A personal guarantee requires that each partner will have to pledge personal assets like their home, car, retirement fund or other personal belongings as collateral for their loan.
Personal guarantees are an unfriendly part of working with banks. However, if your business’ other factors are also unfavorable by the standards of big banks, they might not be willing to work with you at all.
Sharing the Credit
If you’ve considered taking out a bank loan for your business before, you probably know that
your personal credit score will play a significant factor in the bank’s decision to approve your business or not. Even if your credit score is exceptional, if your partner’s credit score is well below average, it can greatly affect your eligibility for a loan.
For example, if your credit score is in the high 700’s, but your partner who owns 50% of your business is in the low 500’s, your application is much more likely to be rejected. Many owners don’t consider this when they turn to bank loans for their small business financing – but there’s good and bad news.
The bad news is this can put your company in a less than favorable position and require everyone with a percentage in business to take a risk they weren’t ready for.
The good news is there are ways to avoid signing a personal guarantee and still get the new business equipment funding you need.
Sometimes, Less is More
Because many business owners are adamant about signing a personal guarantee, getting a business loan without one might require one or more partners to take on a lesser percentage for the time being.
By working with both an accountant and lawyer, you can adjust the ownership structure of your business. Since banks only require partners with over a 20% share of the company fill out personal guarantees, changing that percentage can help certain owners of a business avoid signing one.
Alternative Business Funding
If your business’ current ownership percentage is non-negotiable between shareholders, there are other financing options that don’t require you to pledge personal assets. Online business funding companies like Fast Capital 360 offer unsecured business funding, which means we don’t require collateral on the part of the applicant.
This kind of funding is the preferred alternative to traditional bank loans among businesses with multiple owners, bad credit or the need for funding faster than banks can provide it.
Small business loans with banks and other traditional lenders can be a headache for companies with several owners who don’t feel comfortable signing personal guarantees. Finding the funder that best fits the needs of everyone involved in the ownership of your business is vital to a seamless borrowing experience and the overall growth of your business.
Having a better idea of what to expect when you apply for funding with multiple business owners can help you better plan your approach better. Hopefully, this information helps you and your business partners better navigate your financing options for fast business financing.
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