App version: 0.1.0

How Business Partnership Loans Work

What Are Business Partnership Loans?
Lauren Ward
Lauren WardUpdated March 22, 2022
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Like any small business, a partnership can choose from among several different types of business loans to meet their financing needs, including a bank or 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 financing 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 for everything you need to know 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, 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 has thin or poor credit and explores business loans, however, it might have trouble qualifying for a 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.

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.

Bank Loans

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.Rates: 3% to 7%Terms: 1 to 25 years

SBA Loans

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. Rates: 5.5% to 11.25%Terms: 7 to 25 years

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. Rates: 3% to 7%Terms: Revolving credit

Cash Advance

Also called a merchant cash advance (or MCA), a cash advance isn’t technically a loan, but, rather, the 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 a merchant cash advance is one of the most expensive types of business financing on the market. Your partnership may pay back 20% to 40% (or more) of the amount borrowed. This percentage is frequently displayed as a factor rate, which would equivalently be 1.20 – 1.40.Factor Rates: 1.1 and 1.5 Terms: 90 days to 18 months

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.  

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 on their 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 from their peers. This type of partnership also offers the flexibility to bring more partners in, as well as let partners outDrawbacks 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

Partnership Shareholder Loans

When a partner lends money to the partnership, that loan is generally called a partner loan, not a shareholder loan. A shareholder is an investor in a corporation, and a shareholder loan refers to financing provided to a company by one or more of its shareholders. A shareholder loan must be given with the same terms that would exist in a loan between two independent parties, including having a fair market value interest rate.

Comparing Business Loan Rates

If your partnership 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 small business loans. With Lantern by SoFi’s online lending tool, you can quickly get access to partnership loan options matched to your needs and qualifications. There’s no commitment and only one application to fill out.
Photo credit: iStock/nortonrsx
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0122016

Frequently Asked Questions

Can a partnership get a business loan?
Can a partnership lend money to a partner?
Are loans from partnerships treated differently from other business loans?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
Share this article: