Is Your Business Partner's Bad Credit Holding You Back?
Are you familiar with the phrase “Choosing a business partner is like choosing a wife or husband?”
Compatibility, open communication, passion, trust, a solid work ethic, and expertise are just a few of the qualities that we look for in a good business partner.
Having skin in the game is just as important. When a partner invests his own money in the business it deepens the level of commitment and reflects a determination to succeed. It also provides a greater sense of ownership and responsibility.
But having money invested is just one piece of the puzzle. How your business partner manages money is the other.
Is your business partner fiscally responsible and creditworthy?
As you know, good credit reports and scores are key indicators of how well an individual manages his financial responsibilities.
A positive personal credit rating will tell you that he’s good at managing his personal finances and is considered creditworthy in the eyes of lenders. It shows he takes care of his obligations and does not overextend his credit capacity.
When you and your business partner have good personal credit ratings it can benefit your business in many ways. For example, you can secure financing to develop, grow, and expand your business much faster and easier since lenders use credit scores in their decision-making process.
On the other hand if your business partner has bad credit it can hurt your chances for getting financing. For example, when you apply for a business line of credit, banks require all owners with a 20 percent or greater ownership stake in the business to be included on the application. When one of the applicants has a bad credit rating a lender may deny your request for credit.
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- How to Get a Personal Loan After Filing Bankruptcy
What should you do if your business partner has bad credit?
Here are four ways to overcome a partner's bad credit problem:
- Transfer of Ownership – When two partners in a corporation own 50 percent each, and one partner has excellent credit while the other has bad credit, you can transfer 100 percent of the business to the partner with the strong credit rating. This is especially helpful when applying for a line of credit with a bank. This transfer of ownership is done privately, is simple to complete, and can easily be filed in your corporate record-keeping book. Consult with your CPA and attorney about this tactic -- and remember any transfer of ownership can be transferred back, as well.
- Find a Potential Partner – If you are the sole owner and have bad credit, then finding a potential partner with good credit is also an option. One of the preferred ways to accomplish this is having a spouse become the official owner of the company because he or she has great credit.
- Establish Business Credit – Regardless of whether you or your partner have bad credit you should definitely work on building credit in the company’s name. There are thousands of suppliers willing to extend credit to your business without a personal credit check. As you continue to build stronger business credit ratings, your personal credit will play a much smaller role in getting financing for your company.
- Start a Personal Credit Recovery Plan – While establishing corporate credit your partner should work on rebuilding a bad credit report. Having a plan in place to restore his good credit rating is critical. This plan should consist of credit restoration, new credit, and credit management.
If your business partner’s bad credit is holding you back, don’t despair. The good news is that you now have some real solutions and proactive steps that you and your business partner can take to overcome this temporary hurdle.
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