Business start up with bad credit

[anderson12345]

Hi everyone,

My question is, if three partners go into business but one has bad credit can the other two open accounts and aquire a business loan then bring the third partner (at that time just an employee) in at a later time?

Many thanks, all responses appreciated

[bednobs]

i don't get how the third one would be a partner if she is an employee, or if she hasn't put equal amounts in, or any collateral

[buildersmate]

Confusing terminology in your question.
A business partner who stumps up some money to create the business is caleed a shareholder.
A person who controls the business is called a director.
One can be a shareholder without being a director and also vice versa.
Institutions considering the 'worth' of an application for a business loan will consider the status of the directors, not the shareholders in deciding the merit of granting the loan, or imposing conditions based upon risk analysis

[Skyline D]

Well no, buildersmate, who is normally extremely astute in his answers, appears to have somehoe failed to realise the vast majority of businesses in the UK are not companies, but partnerships! In such businesses a business partner who stumps up money to create the business is in face called a partner ;-)

I "get" the question. It's reasonably straightofrward. What anderson is saying is that three people want to go into business together in a partnership but one of them has a bad credit rating and if he's a partner formally from the get go then the business is unlikely to obtain credit because his rating will count against it. However, if he starts as an employee and the two others start the partnership they can obtain start up loans and credit on their own withouth him coming into consideration. So the question is can they later assume the bad credit rated individual as a partner once the business is set up?

The short answer is yes.

The longer answer is that no-one can prevent you bringing in whoever you like as a partner whenever you like. It's likely though that if you have credit of any significance in the name of the business it will be secured against the personal assets of the two who signed up for it anyway. Bringing in a third partner won't change that and he wouldn't be liable directly in the same way. It's also possible that the lender might wish to withdraw the credit if the third man became a partner and may very well have the right to do so under the terms of the agreement.

For instance a bank may well offer an overdraft facility to the start up two person partnership secured on their personal assets. However, when No3 joins up they might withdraw it, reduce it, or simply not permit him to become a cheque signatory even if he is a full business partner. Or they might happily allow his becoming a signatory with the liability still secured on the assets of the two start up individuals. Who knows? Only the bank in this case can tell you for sure what they would do. The longer you wait and have established a good relationship with them though, the more likely they are to allow it.