How to Protect Your Business When a Partner Has Bad Credit?
Choosing a business partner is not a piece of cake. Compatibility is a must, but it is not the be-all and end-all. Can you both see eye to eye with each other? Do you expect harmony between you two? Do you have the same sort of passion to achieve your business goals? How aspiring and serious is your partner about the business?
You and your partner should be two peas in a pod to make your business successful. Undoubtedly, it counts your perspectives towards money. You both are responsible for your business and therefore, you both have to take care of money. A credit score is part of it. Your business partner should also have a good credit rating.
Businesses often rely on external funding sources. You may need to take out working capital loans in the UK for any reason. A lender will look at the credit rating of all partners. A bad credit score of your partner cannot affect your personal credit rating, but your business might suffer. Lenders take your application a bit risky if any of the partners have a poor credit rating because you all will be responsible for the full settlement of your debt.
Consequences when your business partner has a bad credit rating
Business credit ratings are crucial to maintain because lenders check them to decide your affordability. A credit rating reveals your payment behaviour. It would be good if you had been on top of your payments, and otherwise bad. When your business has a separate identity, you must ensure that you and your partners have a good credit rating.
Lenders will thoroughly check your credit reports of you to ensure that you can repay the debt. Business loans are the obligation of all partners, so even if you partly own the share in the debt, you are obligated to settle the whole amount if your partner refuses to pay it off.
If one of the partners has a bad credit rating, your lender will charge very high interest rates and restrict the loan amount. High-interest payments will affect your working capital. You will struggle to meet day-to-day operations. Chances are you end up rolling over the loan or borrowing money for daily operations. This may push you to the verge of debt.
Business loans are generally more expensive than standard personal loans. Due to a bad credit rating, they will charge even higher interest rates. It is always recommended that you focus on fixing your credit rating.
Ways to protect your business from a business partner with bad credit
Here are the ways to surmount the bad credit problem of your business partner:
- Transfer of ownership
This is the best way to avoid suffering from the damaging impact of the bad credit rating of your business partner. You can transfer the share of a bad credit partner to those who have good credit ratings. Transferring ownership is an ideal solution when your business needs to apply for a loan, line of credit, credit cards and the like. Talk to your attorney to start the process. This is usually done privately.
However, transferring ownership is not always a feasible option. This act requires the consent of partners. Your partner with a bad credit rating likely refuses to give up their share. Of course, hardly anybody is willing to give up their share, especially when there are other methods to improve credit scores.
- Find a potential partner
Instead of getting into the hassle of transferring ownership, you should ensure that you choose a business partner with a good credit rating. However, this cannot be the sole factor in deciding who deserves to be your partner, so do not ignore this. You should carefully assess whether the partner you are choosing has a pragmatic turn of mind. Will you be able to get along down the line? Do you often find yourself on the same page?
It is likely that you have a person who is compatible with your business but they have a poor credit rating. In that case, you may want to ask them to fix it through other means. If your credit rating is bad, your spouse will be the perfect business partner. You can let your spouse be the owner of your business if they have a good credit rating.
- Establish business credit
Your business needs a good credit score if you want to get small business loans in the UK. You should always try to improve your credit score so you do not struggle to get a business loan. Mostly, all business loans are expensive, and if your credit rating is poor, they will be even more expensive. You can avoid high interest rates by keeping your credit score in good condition.
To keep your business credit score good, you should use the following methods:
- Use a business credit card and make sure you pay off the bills on time. Look out for the credit utilisation ratio. The lower, the better.
- Avoid taking on too much of the company’s debts.
- Keep an eye on red flags such as write-offs, negative customer feedback, many credit accounts and negative cash flow.
Apart from that, you should also keep your personal credit score good. Most of the lenders will peruse your personal credit rating too in order to decide whether or not to approve a business loan. This is because you may have to give a personal guarantee. It means you will be personally responsible for paying off the debt when your business fails to pay it off. Remember that your personal assets could be utilised to liquidate your assets.
The final word
When your partner has a bad credit rating, you will certainly face severe consequences. Your business will struggle to get a loan. You will be charged very high interest rates. Your suppliers will also hesitate to provide you with supplies on credit.
It is always suggested that you and your partner keep your credit scores good. Add to that, you need to put in effort to keep your business credit rating excellent. There are various ways to improve personal and business credit ratings.
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