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Co-owner’s personal bankruptcy clouds your business credit

Summary

Think twice before applying for personal credit for your business if your partner can’t manage money well

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QuestionDear Your Business Credit,
My boss is a 33 percent owner of the retail business. His 66 percent co-owner is now in personal bankruptcy after business bankruptcy eight years ago. Can my boss legally apply for separate credit? My boss’s credit is very good. — Elizabeth

 

AnswerDear Elizabeth,
Your company is lucky to have an employee as concerned as you are. Yes, your boss can apply for credit on his own. It is possible that he could find a lender willing to extend credit to the business if he guaranteed the debt as an individual. Often, lenders base lending decisions mainly on an entrepreneur’s personal credit profile. That is why banks ask them to put up personal assets, such as their home, as collateral. In fact, in cases where a business is very small or still young, an owner’s individual credit may be more important than the credit of the business.

That said, experienced lenders will likely do due diligence on the key executives in the firm. It is very possible that if the due diligence is thorough, the co-owner’s financial situation will make them worry that it is risky to make a loan to the business. Your boss, as a result, may have to do some hunting for a willing lender.

There’s also your boss’s now-very-good credit to consider. It is noble of him to want to try to get credit for the business on his own, but since his co-owner is now in dire straits financially, your boss wouldn’t have much of a safety valve if the business fell behind on its monthly payments. All of the responsibility to do that would ultimately be on him.

It’s not clear why your boss’s partner is in personal bankruptcy but, given that he also filed for business bankruptcy in the past, he may have trouble managing money in general. Owning a business doesn’t automatically confer financial expertise.

If I were your boss, I’d do some hard thinking about how the co-owner will handle any money borrowed on behalf of the business. If the partner is reckless with the money, that could ultimately have repercussions for your boss and damage his credit. Your boss could also lose the collateral he puts up – which is no small inconvenience, if that collateral happens to be the house where he lives.

I’d suggest that before your boss borrows anything, he sits down with a trusted accountant and explains the situation. There could be ways to improve the cash flow of the business so that your boss doesn’t need to borrow as much or at all. If your boss’s partner is a great visionary, but tends to blow through money, then the company may need to put some financial controls in place so he isn’t able to do that.

It also might be a good time to bring in a business coach to work with the key executives of the business to make sure the company is maximizing its sales and profits and keeping overall spending in check. Sometimes, an owners’ first instinct is to borrow, but that isn’t always the best one. I have come across many firms that self-finance, keeping big cash reserves on hand to insulate themselves from problems like losing a client. A good coach will be able to see the company with a fresh eye, and that can pave the way to new possibilities for financial growth.

See related:Financing equipment when partners’ credit profiles differ, Am I liable for business debt my partner hid?, Understanding small-business credit reporting

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