How to get business financing - if you have bad credit?

Not too long ago, I read some advice that was posted on a blog. Someone had asked for advice on how to get business financing in light of the fact they had bad credit. I was surprised to see that the expert answer was to sell the company to a friend/spouse with good credit, get financing and then have the friend sell you the company back to them.

Personally, I think this is a dangerous strategy. Before going into why, let me ask you. Does this sound like a good thing to do? Specifically, if you were the one providing the funding, would you be ok if someone did this to you?

This is why I think it's dangerous, and possibly naive, to try this:

1. This is the oldest and most well known trick in the book. Your business financing institution will usually do their due diligence before providing the funding. If they find that the company was recently sold they will usually ask a lot of questions and unravel this quickly.

2. I always advocate honesty.  Having bad credit is difficult but being honest, in my opinion, is always a good policy. It won't be easy. Sure, some business loan companies may decline you. But there are many who appreciate and value honesty and can be willing to give you a break. I know for a fact, we have done that many times ourselves.

3. There is a chance your friend will have to sign a guarantee. The current business financing environment is very tough and many institutions are asking for personal guarantees from owners. If your friend has to sign one, their fate will be tied to the business you sold them. They many not want to go through with the financing.

4. It could create tax complications. You and your friend will need to consult a CPA to address how to report the quick sale and purchase back of a business to the IRS. I suspect, it will require lots of expertise and some paperwork.

5. Let's hope your friend is willing to sell the business back to you. No guarantees that your friend will sell it back to you. Good luck taking them to court if they don't.

6. Many financing contracts address this scenario. Lastly, many contracts have clauses that make the financing line contingent on the new owners also being approved by the insitution

Here is the tough answer to this question. It may be difficult, or even impossible, for a business owners to get a business loan if their (or their business) credit is bad. Period. You will usually be better of by being honest and upfront, and by trying to solve the situations that caused the bad credit in the first place.

Note: This article expresses only my opinion and it is not intended to be legal, financial or business advice. For advice, please see a qualified professional.

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