Taking on a business partner is both rewarding and risky. Your business maybe doing well, but if your partner suddenly has a personal financial setback, such as a bankruptcy or foreclosure, this could very well prevent your partnership from getting a business loan, especially from a bank. However, there is hope. Private commercial lenders like IOU Financial use a variety of metrics that banks tend to disregard to underwrite business loans.
Many partners go into business by incorporating or creating limited partnerships in order to:
- Create a liability shield, in which creditors can’t go after the partner’s personal wealth to settle a debt.
- Ensure that the company bylaws specify that the business’ debts are shared equally among the partners, leading one to believe that no partner will be stuck with an unfair proportion of the company’s debt.
Suppose your partnership gets a bank loan that both partners guarantee, and a month later your partner goes bankrupt and can’t pay back their portion of the loan. From item 2 above, you might think that you are only 50 percent responsible for the business loan, and that your partner, though bankrupt, must still shoulder responsibility for the other half of the loan.
Unfortunately, this is not the case.
When your partnership gets a commercial loan, the guarantor partners are individually and severally liable. That means every partner is 100 percent responsible for the entire loan balance. Your partner went bankrupt, so his personal guarantee was discharged, leaving you responsible for the entire amount.
Your bank will want its money, and as for getting another business loan, they won’t consider it. These are a few of your options:
- You can buy out your partner and then sell the partnership share to another person. If your small business is profitable, you may be in luck..
- You can apply for a loan modification from the bank, removing the previous partner and avoiding default.
- Apply for a debt workout, in which you make a settlement on the company’s debt.
- Or, the least attractive of these options, the partnership files for bankruptcy.
A Better Alternative
Suppose your partner goes bankrupt, but you haven’t applied for your business loan yet. Instead of going to a bank, apply with IOU Financial. Sure, we look at the credit rating of the partnership and its partners, but we also look at the company’s cash flow. Under the proper circumstances, we may indeed be able to approve your business loan. If you have a good track record, been in business for over a year, realize at least $100,000 a year in business receipts, and maintain a daily balance of at least $3,000 in your business account, you definitely need to speak with us.
Here is another scenario. Your partnership already took a loan from IOU Financial, and subsequently your partner hits the skids. You still can refinance your existing loan with us once you’ve repaid 40 percent of the principle.
IOU Financial likes to say yes when banks say no. You can apply for a loan and receive a decision in just a few minutes. Contact us today to learn more about alternative lending that can help protect your assets and the integrity of your business.