Key takeaways
If your business has multiple business owners, securing a business loan can be more challenging.
That’s because lenders heavily consider a business owner’s personal credit score when determining a business’s overall creditworthiness—and multiple credit scores can complicate things.
It’s crucial to get on the same page with your fellow business owners before applying for a loan. You need to make sure each of your credit histories is accurate, and that you’re in a position to carry the debt together.
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, etcetera.
And that’s only if you’re a business owner operating alone. The process gets more complicated when you have a co-business owner—or even two or three co-business owners. Don’t worry, though. We’re here to walk you through the process of applying for a business loan with multiple business owners, so you and your crew can land the loan you need.
How character comes into play during business loans
Having multiple business owners won’t necessarily reflect negatively on your loan eligibility, but having multiple business owners can complicate the whole ordeal. That’s because when lenders and underwriters evaluate the creditworthiness of potential borrowers, they follow the 5 Cs of Credit:
Character
Capacity
Capital
Collateral
Conditions
Character is critical 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 your personal credit score than your business credit score when evaluating your application.
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.
So what does that mean for small businesses with multiple owners?
Well, the chancesof 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.
A step-by-step guide to applying for a business loan with your co-owners
Follow these steps to position yourselves for success:
1. Confirm ownership and eligibility
Not every lender operates the same way when it comes to processing loans with multiple business owners. Banks generally require that all business owners with at least 20% 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.
Alternative lenders, on the other hand, usually accept different arrangements. Some require that 60-70% 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% 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% overall representation is enough, as long as everyone with 20% 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.
That’s why it’s crucial to first confirm your ownership split and make sure you and your co-owners are aligned when it comes to the exact breakdown of ownership.
2. Agree on loan purpose and terms
The second step is to sit down with your co-owners and discuss your goals for getting business financing. Maybe you need a flexible, short-term working capital loan to cover a couple of upcoming projects and major purchases. Or maybe you’re trying to get a long-term real estate loan so you can invest in a piece of land or a building.
Make sure you agree on the following:
The type of loan you want and the loan amount
Your business needs: what exactly you’ll put the funds toward, and how you plan to use the loan to grow or stabilize your business
Your plan for paying back your loan
3. Check individual credit profiles
Before you start researching lenders, take the time to check your individual credit profiles. You’ll want to see what your personal credit score is so you know what you’re working with, and review your credit report for any inaccuracies (accounts that aren’t yours, for example, or mistaken late payments).
If you spot any issues, whether it’s a minor error like a misspelled name or a bigger problem like an incorrect credit limit, you need to contact the credit reporting company to resolve it. Make sure you have any supporting documents and receipts you’ll need for proof.
Here are a few more tips:
Make sure you’re not all 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 Small Business Administration (SBA) has a six-month lookback period to guard against this, but alternative lenders generally don’t.
4. Choose your lender and loan type
Applying for a business loan is a delicate balance: you need to figure out which financing option will give you the capital you need, while also taking into account which one you have the best chance of being approved for.
Most business loan options fall into two different buckets: banks and online lenders.
Banks usually offer a wide variety of financing solutions—from long-term loans and business lines of credit to short-term loans and business credit cards. They also tend to have higher borrowing amounts and more favorable repayment terms, like longer repayment periods and lower interest rates.
However, the eligibility criteria are more rigid. Most large banks require applicants to have credit scores of 680 or higher, at least two years of operating history, and annual revenues above $250,000. Plenty of banks also want proof that your business is profitable and competitive, and they’ll ask for collateral to secure your loan, too.
Another note about banks: the approval process for a loan takes a lot longer, sometimes a few months. There’s typically a good amount of paperwork involved, and you may have to attend some in-person meetings as well.
Online lenders, on the other hand, usually specialize in one or two types of loan programs, like a merchant cash advance or line of credit. They typically have less favorable terms, so you might get a smaller amount of capital or a higher interest rate. But the beauty of online lenders is their ease: not only do they have a faster application process and a shorter turnaround time, but they also tend to have less rigid eligibility requirements (think: credit scores in the neighborhood of 600 and just six months of operating history).
When you discuss which loan to apply for, make sure you account for the following factors:
Your financing needs: How much capital do you need, and what do you need it for?
Your business’s cash flow and operating history: How long have you been in business, and how much cash flow do you have?
Your business owners’ personal credit scores: Are your credit scores all excellent, all decent, or all over the map?
Your collateral and personal guarantees: Do you have business collateral to put on the line? If not, are you comfortable with your personal assets being at risk?
Your funding timeline: When do you need funds? How long can you afford to wait for a loan?
5. Gather the required documentation and submit your joint application
Once you get your paperwork together, you can officially apply for your loan. Along with a comprehensive business plan, you’ll also need your business’s financial statements and tax returns from the past two or three years. Here’s what to organize:
Business license and registration
Business plan
Profit and loss statement
Cash flow statement
Balance sheet
Sales forecast
Cash flow forecast
Bank statements
Personal tax returns
Business tax returns
Collateral documentation or personal guarantees
6. Review the terms and sign loan documents
If you apply for a bank loan or an SBA loan, you might not hear whether your application is approved or denied for several weeks—or even months. Online lenders usually respond more quickly, within a week or a few days.
Once you have your loan offer, sit down with your co-business owners to review all the terms. Look over your proposed interest rate, repayment period, and fees. By this point in the process, you should already have a good idea of how you’ll handle monthly payments and what you’ll put the funds toward. After you sign on the dotted line, you can officially put your plans into motion.
Great communication + strong credit = Joint business loan success
Approaching the small business loan process with multiple owners is 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.
FAQs
How does a joint business loan affect each borrower’s credit?
A joint business loan affects each borrower’s credit the same way, regardless of the business’s ownership split. That means if you make payments on time and in full, both your and your co-business owner’s credit scores will be positively impacted. Missing payments, on the other hand, will negatively affect both of your credit scores.
What are the pros and cons of a joint business loan?
Taking on a joint business loan can be a great way to share the debt load and repayment responsibility for a loan. Plus, if both you and your co-business owner have great personal credit scores, you could have a higher likelihood of getting approved for a loan by applying together—and receiving more favorable loan terms, too. The downside of applying for a joint business loan is the inherent risk it presents. When lenders have to evaluate two or more personal credit histories when considering a loan, there’s more opportunity to find issues. If one or more borrowers have tons of debt or less-than-ideal personal credit scores, you might have a harder time getting approved for a loan. Another potential issue is the liability: you’re responsible for repaying the loan even if your co-business owner doesn’t pay their share.
What happens if one borrower can’t repay a joint business loan?
If your fellow business owner can’t repay their portion of your joint business loan, chances are you’re still on the hook for it. Most joint loans require borrowers to agree to take responsibility for the full loan balance, not just their share. If you can’t come up with the funds on your own to cover your complete repayment, you might have to negotiate a new repayment plan with your lender or look into restructuring your debt (by refinancing or consolidating loans) to get a better interest rate or simpler repayment plan.
How do lenders determine ownership percentages in a joint business loan?
Lenders don’t determine ownership percentages in a joint business loan—that’s up to you as the business owners. You’ll communicate your ownership percentages in your loan application, and the lenders will take those into consideration when reviewing.
