Applying for a business loan involves a lot of moving parts. You’ve got your credit score, annual revenue, and bank statements — plus, depending on the type and source of the loan you’re looking for, you’ll also need your tax returns, payroll information, balance sheet, profit and loss statement, business plan, proof of ownership… The list goes on and on.
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With all these factors converging, it makes sense that there are plenty of aspects that could be hurting your eligibility without you even knowing about it. Fortunately, all you need is a quick lesson on what shared ownership means in the lending space. In this piece, we’ll explain exactly what you and your co-owners can do to land the loan you need.
The problem with sharing
First, let’s back up a little and make a quick clarification. It’s not that having multiple owners will necessarily reflect negatively on your eligibility. The sharing isn’t the problem. Instead, multiple business owners can complicate the whole ordeal. But why is that?
The cast of characters
When lenders and underwriters are evaluating the creditworthiness of potential borrowers, they follow the 5 Cs of Credit:
They’re all fairly self-explanatory, but cover a lot of the underwriting process when you dive deeper. The one we’re interested in today is Character. This part of the application reflects your reputation; you can tell a lot about someone if they make their payments on time… or so lenders think.
Character can be measured in a lot of different ways, but one of the main metrics is your personal credit score. Since it tracks how you’ve historically dealt with debt, a lender will see it as a good indicator of the future, too.
That being said, you are not your credit score — and lenders know that. Your business plan, loan usage, social media accounts, and endorsements from community members: all of these things are taken into account by lenders, and they fall into the “Character” bucket of the 5 Cs.
Small business characters
Character is even more important when it applies to small businesses — since lenders generally see your company as an extension of yourself. That’s why they often care more about personal credit than business credit when evaluating your application.
So what does that mean for small businesses with multiple owners?
Well, the chances of your company’s overall credit profile showing risk increases, simply because more people are involved. If one person has some minor issues but an otherwise good profile, then a lender might not mind. But if multiple people all have mostly passable credit histories, those missteps could compound and worry the lender much more.
If everyone who has a stake in your business has a pristine credit history and no personal debt issues, then having multiple owners shouldn’t be a problem. The thing is, it’s usually not that simple.
The eye of the beholder
Now that we understand the underlying risk, let’s talk about how lenders break down these types of situations.
Banks generally require that all business owners with at least 20 percent ownership need to sign onto the loan — and that includes the personal guarantee (PG). The situation can get a little dicey when you have multiple signatories on a PG, so make sure you brush up on how they work with a lawyer or accountant. You don’t want to have to settle with your fellow business owners if the bank ends up going after one of your assets.
As you might expect, different lenders accept different arrangements. Some require that 60 to 70 percent of the overall ownership is represented somehow, without really caring about the breakdown. So if you have four owners with a 30-25-25-20 split, and the 30 percent owner has the worst credit of the bunch, you could potentially “hide” him or her by not including that owner on your loan application.
For others, 50 percent overall is enough — as long as everyone with 20 percent or more is included. Some lenders will look at one owner as the primary, so you might still have a shot at qualifying even if your total ownership is a bit lagging in the creditworthiness department.
Some words of advice:
- Make sure you’re not swimming in personal debt. Credit cards, student loans, mortgages, car loans, medical bills, and foreclosures can all impact your eligibility. Be an open book with your fellow owners, and ask them to do the same for you.
- Present the strongest overall credit profile possible, which will solidify your lender’s faith in your business’s ability to repay that loan.
- If you’re facing some trouble, consider reorganizing your business structure. That means rewriting your articles of organization, redrafting your operating agreement, and re-registering with the state. It’s a lot of work, but a potential workaround if one of the owners has credit problems. The SBA has a six-month lookback period to guard against this, but alternative lenders generally don’t.
Approaching the small business loan process with multiple owners is just a little more complicated, depending on where you are applying. But with a solid understanding of the space, it doesn’t have to be so hard. Before you start the application, sit down, grab some coffee, and have an honest discussion with your co-owners about everyone’s credit history. An in-depth understanding of the past is the only way you’ll build toward the future — together.