Can multiple owners apply together for a business loan?
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UPDATED: Dec 21, 2012
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Multiple owners can apply together for a business loan.
The safest way to do this is for the group of owners to begin a partnership prior to applying for a loan. In a partnership, each partner contributes to all areas of the business including labor, money, and property and in return, they share both the losses and profits.
Partnerships are not to be confused with a co-signed loan.
When a business loan has a co-signer, it simply means that another person, the co-signer, is financially linked and liable for the new loan. It does not mean that the co-signer has any legal ownership.
There are three types of business partnerships:
- General partnerships
- Limited partnerships
- Joint ventures
General partnerships allow for management, liability, and profits to be distributed equally among all business partners. There is an option for unequal distribution, but the definition of each partner’s responsibilities needs to be labeled before the partnership is agreed upon.
Limited partnerships allow partners to have less liability and less management input. Each partner’s power depends on their share of the business. Limited partnerships are more common for investors of short-term projects, rather than long-term owners.
Joint ventures are general partnerships held for a limited period of time. When joint ventures begin, a set project or end date must be established.
For the sake of business loans, it is more stable for general partners to apply for a joint business loan, but it is not unheard of for either limited or joint ventures to agree on a new loan. It all depends on the financial agreement made by all business partners.
Partnerships can be an inexpensive way to begin a new business. Sharing financial responsibilities and grouping together personal credit scores enables multiple borrowers to attain a better interest rate on a business loan. On a non-financial level, having a partnership can bring various owner’s talents together for the betterment of their company.
But every business decision comes with some risk. The positive aspects of partnerships can change into negative aspects if the owners do not act accordingly.
Unlike sole ownership, where an owner can proceed with decisions as they please, partnerships distribute the decision-making power to all partners. If one owner wants to spend company resources on a new building whereas the other owners wants to increase the marketing campaign, issues will arise unless the owners can work around their disagreements.
Another potential downfall is shared profits. Each partner must share the profits of the business with other partners. If one partner is lazy and skirts by on all the major projects, they are still legally bound to the financial success or decline of the business; and this can cause serious internal problems for all partners.
Since partnerships involve multiple decision makers, it is important for potential partners to discuss how the business should operate before any legal and financial decisions are made, which includes the signing of a business loan agreement.