According to the SBA, 90% of our nations small businesses are family owned. Of course, “family owned” does not always mean it’s a husband & wife team but many of them are as referenced here. We all know that small business owners need capital today as bad or worse than ever. We’re not here to complain about the way small business lending statistics are deceiving but it has a lot to do with the recent changes made by the SBA.
The bottom line is that it’s hard enough if you’re a small business owner in need of capital (or might be in need of capital in the future) so if you’re a husband-wife team, a family-owned business, or a partnership of any kind then these are the 3 key tips you’ll need to plan for (or respond to) if you want to have the best possible chance of getting your funding.
#1 – Think about the loan you will need in 2-3 years NOW! This is advise that comes from the perspective of being able to borrow money more efficiently after you get the business going. There are many credit mistakes that I’ve seen husbands and wives and partners make over the years. Some of the mistakes are minor and others can be more costly and limit your borrowing capabilities as you grow your business. Borrowing money for your business is like anything else. You can do it the right way or you can do it the wrong way. You need to think about whether you want to “co-sign” for your mortgage(s), car loans, and credit cards.
You may both need to be part of the mortgage for qualification purposes but that is rarely necessary for car loans and credit cards. When there is only one PG (personal guarantor) on your credit cards then you get the best of both worlds. From a credit perspective, all your accounts are considered “trades” or “trade lines.” So your credit profile is really just a compilation of all the individual trade lines therein. If you could choose which trade lines you wanted on your credit report then imagine what that could do. If your spouses credit cards are old and have low balances then you’ll want to be an authorized user on those credit cards.
On the other hand, if the credit cards are less then 2 years old or have high balances in relation to their credit limits (high utilization) then you do not want to be an authorized user on those accounts because that trade line would hurt your credit.
#2 – If you or your spouse/partner have “less than perfect” credit then fix it NOW! I realize that a lot of people get frustrated with credit scores and how credit works. It’s actually not as confusing as you may think it is but instead of focusing on what may not make sense, let’s focus on how to work within the current banking system and how to have success with your loan requests given the current credit & lending terrain. If you or your partner don’t have the credit profile and score that will help you get approved for financing then it’s simple. Fix it.
There’s only 2 ways to improve your credit profile. You can either add some good stuff or remove the bad stuff. The problem is that most credit repair companies are…ahem…not good. Find a quality individual or company and hire them to improve your credit. The National Association of Responsible Credit Repair Advisors (NARCRA) is a good resource to find a credit professional. You can improve, repair, or fix your credit if it’s not good but it’s unlikely you can do it yourself.
Technically, there’s nothing a credit repair agency can do that you can’t do yourself…but you could also represent yourself in court instead of hiring a lawyer. Would you do that?
#3 – Strategically determine how you share the ownership % of your business! 50/50 Ownership or 80/20 – I can’t tell you how many times I’ve seen businesses who needed $50,000 – $200,000 to take their business to the next growth level but there’s one “minor” problem. One owner has good credit and the other owner has poor credit…so the bank said no to their loan request. When determining the ownership % of your business it’s a wise idea to keep in mind that most banks – for most loan requests – require that anyone with 20% or more ownership in the business be included in the credit and underwriting portion of the loan request.
In other words, their credit gets checked and if they have bad credit then you don’t get approved for your loan. If you have bad credit and your spouse has good credit then it would be wise to consider making your spouse the majority owner. You’ll probably want the spouse with the good credit to be the 85% or 90% owner since that puts you in the clear with most ownership requirements from most lenders. This all sounds easy if you’re starting a new business but what if you’re an established business and you’ve already established the ownership at 50/50?
Just make a change. It’s a simple addendum or revision to the articles. Just ask your business consultant, corporate formation consultant, or attorney and they can help you if you don’t know how to make this change yourself.
As a husband/wife team there are some great ways to properly separate and utilize your credit profiles so you can maximize your credit scores and position yourselves in the best possible way to get your financing. As always, consult with your business consultant, lawyer, and accountant but remember that they work for you. Most people resist ideas and strategies that they are unfamiliar with and there’s a good chance that if these advisors haven’t presented these concepts to you then they probably are unfamiliar with them.
Marriage Photo via Shutterstock