From the Department of Naches (Yiddish for “joy”) and Brag, I was interviewed by Forbes.com on one of my favorite subjects: business partners. How to choose them, what to look for and what to put in your business partnership agreement (or shareholders’ agreement or operating agreement–whatever the form of your business).
One of the tidbits I’m really glad made it into the article, “What to Look for in a Business Partner,” was the one stressing the importance of checking your partner’s credit history. It sounds “not nice” to ask such prying questions, doesn’t it? Here’s an ugly way the partnership can play out (I’ve seen it happen) if you don’t:
- Your company needs a bank loan. The bank checks the credit history of all owners (count on it). It refuses the loan because of your partner’s shaky credit history.
- You seek outside financing elsewhere. You can get it (e.g., credit lines) but your partner can’t (because of said credit history). To do so, you 1. mortgage the house or 2. provide a personal guaranty for the credit lines.
- The business needed more than your one credit line could provide, and now you’re both tapped. The business goes under. Guess who’s on the line to pay back the debt? Answer: It’s not your partner.
- Your partner is a slow (or no) payer when it comes to reimbursing her share of the debt. Does the bank or credit agency care? Answer: No. It’s your good credit that could be adversely affected if you don’t have the wherewithal to meet the monthly payments yourself.
Still think it’s “not nice” to ask about credit history?
I was wondering – if my new business financing involves private investors how important will the personal credit be of the principals?
Your personal credit can still be a factor with private investors. Private investors–especially those who are not family or friends (who might be a little more forgiving or willing to take a risk)–will want to have some sense of your track record so that they can gauge the likelihood of having their investment pay off. If you’ve been in and out of bankruptcy court and fraud or collection lawsuits like a revolving door, that certainly sends a message about how well you may manage their money.
If your personal credit history has some hiccups, best thing is to disclose that yourself (if you hide it or misrepresent it, it could be grounds for fraud). Provide a reasonable explanation as to what the problem was and the safeguards you’ll consider putting in place so that it doesn’t happen again (if other than a one-time event).