By , Jared Hecht
Published June 24, 2016
If you’re a small business owner looking for financing, your personal financials will play a big role in your loan application. Lenders will look at your personal credit score and ask for a personal guarantee to back their capital. For them, your life isn’t entirely separate from the health of your business.
But what happens if that business has more than one owner?
Business loan applications with multiple owners aren’t all that different, but there are some important considerations for you to make -- especially when it comes to whose financials those lenders will scrutinize.
Follow these steps before filling out that loan application if you’re one of several owners of a business in need of a loan.
If you have 20 percent or more ownership in your small business, chances are good that your financials will get examined by your lender. This 20 percent rule was started by the Small Business Administration, which requires a personal guarantee from all owners with at least 20 percent ownership applying for an SBA-backed loan. Personal guarantees let lenders recoup their funds if a borrower defaults, and this was the SBA’s way of protecting its lending partners from irresponsible business owners.
Related: Cash Crunch: What's the Best Loan for Your Small Business?
Many banks and lenders have followed suit, looking to the personal assets of all owners with 20 percent or more to act as collateral for their loans.
But it’s not just a matter of personal guarantees. Lenders also examine the credit scores of owners with 20 percent ownership or more when deciding whether to extend a loan offer or deliberating its terms.
In short, if you’re applying for a loan, check to see which owners have the most invested in your small business: they’ll have the biggest impact on your application.
Next, make sure to discuss with the business owners whose credit scores and personal assets will matter to the lender.
Related: 6 Smart Reasons to Get a Business Loan
While time-consuming and complicated, changing your business’s ownership percentages could help you qualify for the financing you need.
First, understand the policies of the lender you’re trying to work with. The SBA has a six month look-back policy, for example, which means you’ll have to adjust percentages far in advance. Other lenders might look at your articles of incorporation or tax forms. Still other alternative lenders might not follow the 20 percent rule at all, but instead only require that 70 percent or even 50 percent of the business’s total ownership be represented.
Next, work with an accountant and a lawyer. Each entity type has its own ownership rules, which can also vary by state, so you don’t want to make a mistake.
S-Corporations and C-Corporations require that owners buy shares from each other or the company, record the stock transfer, and file new incorporation paperwork with the state. For Limited Liability Corporations, you’ll have to swap stocks according to your LLC operating agreement, but you won’t necessarily need to update incorporation paperwork.
Related: The Real Reason Banks Deny Loans to Many Small-Business Owners
Don’t try this on your own, no matter how legally savvy you might be. Messing with the terms of ownership in your business’s articles of incorporation could have serious repercussions, so you’ll want to verify everything with experts.
https://www.foxnews.com/us/multiple-owners-heres-how-to-prepare-for-your-loan-application