Like any small business, a partnership can choose from among several different types of business loans to meet financing needs, including a bank or a SBA term loan, a business line of credit, or a cash advance. It’s also possible for one partner to personally loan capital to the business. This type of partnership loan is treated in a similar way to a loan from a third-party lender.
Which type of partnership loan will work best for your business will depend on how much capital you’re looking for, how your partnership is set up, and the personal resources of each partner. Read on to learn how to get the right type of partnership business loan.
What Is a Partnership Loan?
A business partnership is a way of organizing a company that is owned by two or more people. The partners typically invest their money in the business (or buys into the partnership), and each partner benefits from any profits and sustains part of any losses.
When a partnership needs an influx of funds, say, to increase working capital or expand the business, it may choose to borrow money from a third party, such as a bank or online lender. If the partnership is new or has poor credit, however, it might have trouble qualifying for a small business loan with favorable rates and terms. In that case, one of the partners might choose to loan the partnership the money it needs. Either scenario can be considered a partnership loan.
If, at some point, the owners of a partnership decide to go their separate ways, one partner can typically buy out another partner by getting partner buyout financing.
How Partnership Loans Work
Taking out a loan from a third party in the name of the business works the same way as any small business loan. When applying for a business loan, the partners will likely need to provide business financial documentation and a business plan, as well as information about their own personal financials, including tax returns and personal financial statements.
If a loan is coming from one of the partners, the process involves drawing up paperwork to define the terms of the loan, including the amount, interest rate, and repayment schedule. If the business fails, the partner’s loan will be treated as a business debt that gets paid back before partner distributions of any profits.
In a general partnership, all partners are personally liable for all business debts. In a limited partnership, a limited partner can’t be forced to pay off business debts or claims with personal assets.
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4 Types of Partnership Loans
There are many types of business loans available to partnerships. Here are some you and your partner (or partners) may want to consider.
1. Bank Loans to Partnerships
Banks offer traditional term loans, in which you borrow a set amount of money and pay it back with interest on a predetermined schedule. These loans typically come with competitive rates and terms, but they can also be difficult to qualify for. If you have strong credit and can afford to wait for financing, a bank loan can be a great option for a partnership loan.
2. SBA Loans to a Partnership
The U.S. Small Business Administration (SBA) doesn’t provide business loans, but partially guarantees loans that banks and other lenders make to small businesses. By partially guaranteeing the loan, they eliminate some of the risk to the lender. As a result, SBA loans typically offer high amounts, low interest rates, and long repayment terms. However, they have fairly stringent requirements to qualify.
The standard SBA 7(a) loan can be a good option for partnerships that need working capital or want to expand or acquire a business. The SBA 504/CDC loan can be ideal for a partnership that wants to finance the purchase of equipment or real estate or make upgrades to existing property.
3. Business Lines of Credit
A business line of credit is similar to a credit card, but the difference is that the line of credit can be much higher if you have a strong financial profile. Business lines of credit can be a great option if your partnership needs working capital but doesn’t have a set amount that it needs to borrow. With this option, you only pay interest on what you actually borrow.
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4. Cash Advances
Also called a merchant cash advance (or MCA), a cash advance isn’t technically a loan, but a sale of future revenue in return for cash today. With an MCA, you sell your future revenue at a discount to a merchant cash advance company. To collect their money, the advance provider will usually deduct a percentage of your daily credit and debit card sales.
The benefit of this type of partnership financing is that when business is slow, you pay back less, and when business is booming, you pay back more. The downside, however, is that an MCA is one of the most expensive types of business financing on the market.
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Why Business Partnerships Might Need Loans
Here are some common reasons why a business partnership might benefit from outside funding.
To Boost Cash Flow
Cash flow can be a constant challenge for any small business. Without sufficient working capital, your partnership may struggle to manage day-to-day business operations, pay your employees, or cover emergency expenses. A short-term business loan can help you keep funds flowing through your business, even when profits dip.
To Fund a Marketing Campaign
Marketing is often key to a business’s success. But common methods — like advertising, social media marketing, public relations, and search engine optimization — cost money, which you might not have sitting around. A partnership business loan can help you start or expand your marketing efforts. This can lead to more customers and, in turn, more profits.
To Hire More Staff
You and your partners may like keeping things lean. However, if your small team is doing it all — from bookkeeping to sales to customer service — things could start falling through the cracks, impairing your business. Financing can allow you to bring on more employees, freeing you and your partners up to focus more on the big picture — growing your company.
To Buy Equipment or Inventory
A business loan can help your partnership buy important pieces of equipment you might be lacking, or replace equipment that has become outdated or inefficient. With equipment financing, you can often use the equipment you’re buying as collateral, which means you don’t have to put any of your partnership’s assets on the line.
If your partnership business sells products, there may be times when you want to place a bulk order, say before your busy season or if you find a discounted price. A short-term business loan can help you cover the cost of keeping your warehouse fully stocked.
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Types of Partnerships
Choosing a business structure is an important decision in the early days of a new business. While any business that is operated by two or more owners falls under the partnership category, there are several different types of partnerships, and each set-up has its pros and cons. Here’s a look at the three different types of partnerships.
General Partnerships
A general partnership is the simplest type of partnership and the easiest to set up. In fact, it’s the default business structure when more than one person starts a business and does not formally file documents with the secretary of state.
In a general partnership, all of the owners share equal rights and responsibilities, and each partner has full responsibility for all of the business’s debts. There are no legal state filing requirements for general partnerships, which means the business doesn’t have to pay ongoing state fees.
Benefits of a general partnership: It’s quick and easy to establish and set up, and ongoing costs are lower than other types of partnerships.
Drawbacks of a general partnership: Because general partnerships are very similar to sole proprietorships, any personal assets each member possesses can be used to settle debts and legal disputes. Should you be sued or default on a loan and your business is unable to settle the issue, your personal assets may be at risk.
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Limited Partnerships
In a limited partnership, limited partners are able to enjoy a separation between their business and personal assets. Should the business become unable to pay its debts, a limited partner won’t lose any personal assets, such as their house or car. Limited partners also do not play a role in day-to-day management operations, though they still benefit from business profits.
At least one of the business owners in a limited partnership, however, must accept general partnership status. While the general partner is able to enjoy sole control over the management and daily operations of the business, that person’s personal assets would be vulnerable to the business’s debts and obligations.
Benefits of a limited partnership: Limited partners don’t have to worry about their personal assets ever being at risk, and the general partner can enjoy complete control over the company.
Drawbacks of a limited partnership: The general partner is at risk of losing their personal assets in the event of a legal dispute or loan default. In addition, limited partners have no say in the management of the business.
Limited Liability Partnership
A limited liability partnership offers personal liability protection for all of the partners involved. This can be an ideal type of partnership for lawyers, doctors, dentists, and other professional businesses because it protects each partner from the debts, mistakes, or malpractices of another individual in the partnership.
Benefits of a Limited Liability Partnership: All business owners are protected from any kind of legal disputes or debts incurred by their peers. This type of partnership also offers the flexibility to bring more partners in, as well as let partners out.
Drawbacks of a Limited Liability Partnership: Any partners involved in wrongful or negligent acts are still personally liable. In addition, it can be difficult to navigate any business changes since no one person is in charge. Businesses often circumvent this by assigning roles to each partner and signing a partnership agreement.
Pros and Cons of Partnerships
| Pros | Cons | |
|---|---|---|
| General Partnership | Fast to establish | Personal assets can be seized to settle a debt or legal dispute |
| No state filing or fees required | Disputes between partners can cause the business to fail if there’s no partnership agreement | |
| Limited Partnership | Limited partners aren’t at risk of losing personal assets | General partners’ personal assets can be at risk |
| General partner gets to call the shots | Limited partners have no say in running the business | |
| Limited Liability Partnership | All business owners are protected in the event there is a legal dispute made against another partner | Individual personal assets are still at risk for partners that get into a legal dispute |
| Offers the flexibility to bring partners in and let partners out | Can be difficult to make major changes to a company without a partnership agreement |
Partnership Shareholder Loans
A shareholder is an investor in a corporation, and a shareholder loan refers to a loan provided to a corporation by one or more of its shareholders.
When a partner lends money to a partnership business, on the other hand, that loan is called a partner loan. It’s not a shareholder loan because partners don’t own shares in a partnership; they own interests or a percentage stake. Only loans made by shareholders can be called shareholder loans. However, the terms — and the results — of shareholder loans vs. partnership loans are similar.
Bona Fide Debt
For a shareholder or partnership loan to be considered a bona fide debt, it needs to be treated as a loan from a third party with a written promissory note or loan agreement. It also needs to have a fixed payment date and stated interest rate. With this arrangement, the business can typically deduct interest it pays the lending partner (or shareholder) just as if the loan were between two unrelated parties. In addition, the lending partner or shareholder will typically need to report that interest as income.
Loans From Members to the LLC Partnership
A limited liability company (LLC) is not a partnership; all of the LLC owners are referred to as members, rather than partners. However, just like partners can loan money to a partnership, LLC members can loan money to the LLC.
The Takeaway
If your partnership firm is looking for capital, there are all kinds of small business financing options to consider. To make sure you’re getting the best rates and terms for your business, it can be a good idea to shop around and compare the various small business loan options.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Can a partnership get a business loan?
Yes, partnerships are eligible to get the same business loans that are available to all small businesses.
Can a partnership lend money to a partner?
Yes, just as a partner can loan the business money, the business can loan money to one of the partners.
Are loans from partnerships treated differently from other business loans?
No, whether a loan comes from a third party, the partnership, or one of the partners, it is treated the same way.
Can a partnership take a loan from partners?
A partner can typically borrow from the partnership, as long as all the partners agree to the loan. The partnership should draw up a promissory note that details all the terms of the loan and have it signed by the borrowing partner.
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