Why Are Banks More Willing to Lend Money to Partnerships than to Sole Proprietorships?

Entrepreneurs consider various ownership structures when they plan their business. Some choose to work for themselves, organizing as a sole proprietorship. These entrepreneurs make the decisions and face all challenges themselves. Others choose to enlist partners and organize the group as a general partnership. When entrepreneurs pursue funding through a bank loan, they often meet with more success as part of a partnership. Several reasons account for this trend.

When an entrepreneur organizes her business as a sole proprietorship, she benefits from the profits earned as a result. However, she suffers the consequences of poor decisions, such as those leading to lost profits or dissatisfied customers. Any claims made against the business also apply to her personal assets. When the entrepreneur organizes her business as a partnership, she shares control over the company’s decisions. She also shares the profits earned and losses incurred with the partners. Any claims made against the business also apply to each partner’s personal assets.

Banks consider business assets as collateral for a loan. A business with more assets provides more resources with which the business can make its payments. A business with more assets also provides a higher value of collateral for the bank to seize if the company defaults on the loan. A partnership begins with the assets contributed by each of the partners. If the entrepreneur existed as a sole proprietorship, the only assets owned by the business would be the ones he contributed.

The more people who are liable for the bank loan, the more likely the bank is to collect its money. An entrepreneur operating the business as a sole proprietorship serves as the only person the bank can pursue to collect on the loan. If the entrepreneur’s business and personal resources run out, the bank collects nothing. When the business operates as a partnership, the bank can pursue legal action against each of the partners to collect on the loan. This increases the bank’s likelihood of receiving payment.

Banks prefer to lend money to businesses with greater opportunities for success. A sole proprietor builds her business based on her knowledge and experience and operates in areas where she lacks expertise. A partnership builds a business using the knowledge of each partner, expanding the expertise of the company’s management and the company’s success.