Small Business Loan Application Tips for Firm with Multiple Owners

Microfinance in India has a primary objective — to help small businesses grow financially independent through small business loans and other credit facilities. Small and medium enterprises can opt for SME financing to safely and quickly fulfil their financial requirements.

If you own a small business and are looking for SME financing, your personal financials can play a crucial role in the business loan application. Before approving your small business loan application, lenders tend to look at your credit score and ask for a personal guarantee to back their capital. 

The whole process of a business loan application changes when it involves more than one owner. 

However, a small business application with multiple owners includes the same process. Nevertheless, there are some specific considerations that you have to keep in mind when it comes to whose financials the lenders will scrutinise. 

If your business involves several owners, follow the underlying tips to make a successful loan application:

20 per cent rule 

This rule was started by the Small Business Administration, which enables the lenders to require a personal guarantee from borrowers who have 20 per cent or above ownership of the business while applying for a small business loan. It is the lenders’ way of protecting themselves from irresponsible business owners. Therefore, if you have 20 per cent or more ownership in your business, your finances will likely get examined by your lender. 

Often, lenders consider the personal assets of all owners with 20 per cent or more ownership as collateral. Furthermore, lenders also examine the credit scores of all such owners when deciding whether to approve the loan application or reject it. 

In short, if you are opting for SME financing for your small business, check which owners have invested more than 20 per cent. They will have a more significant impact on your application. 

Understanding the application strength 

A rule of thumb would be to build a good application form before presenting it to the lender. Discuss with other business owners about their credit score and their assets. Owners who have more than 20 per cent ownership of the business. 

Here are some of the aspects that you need to discuss with your business owner:

Credit score

You will need to find out if each owner’s credit score high enough or will a lower credit score hurt your chances of qualifying for the loan amount you need. It may be uncomfortable having owners talk about their spending habits, but it is necessary. 

Personal Guarantee

It is essential to understand that each owner with more than 20 per cent ownership is eligible to sign a personal guarantee. Signing a personal guarantee means putting your assets at risk if you default on your business loan. You will have to convince your business partners, or else your business loan application is a non-starter. 

Personal guarantees are necessary for the banks. Having something as collateral assures them of timely repayments. So, before opting for SME financing, make sure you have your business ownership on board in terms of a personal guarantee. 

Change your ownership percentage

There is also another way of covering the small business loan risk. Upon mutual agreement, partners can decide and change their ownership percentages as required to get a loan. Although it is one of the most time-consuming and complicated processes in a business loan application, changing your business’ ownership percentages could help you qualify for SME financing. 

You will, first of all, need to understand the policies issued by the lender. Before your application submission, look for the adjustments required and work with your business owners to adjust percentages according to the lender’s policy. 

Some lenders might look at your articles of incorporation or tax forms, while others might require only above 50% of the total business ownership.  

After looking at the lender’s policy and making the necessary adjustment, the next step is to find a lawyer and an accountant and seek professional guidance. If the owners cannot deal with the legalities of debt financing in detail, it would be wise to take professional help. 

In short

SME financing is a great way to finance your business expansion strategy. However, if your business involves more than one ownership, you have to follow the tips mentioned above to make a successful loan application. Apply for the business loan only after finishing and settling all the above requirements and formalities.