Lending Library

UPDATE: The PPP loan application period ended May 31, 2021. Apply for the Employee Retention Credit today through Lendio.

Lendio strives to provide you with the most current information as it relates to the Paycheck Protection Program, related SBA programs, and relevant regulations. The rules and regulations governing these programs are being regularly clarified by the SBA, and other agencies. In some cases, the provided guidance may directly conflict with other competing guidance, laws, rules, or regulations. Due to these changes, Lendio cannot guarantee that the information contained in this page reflects new changes or updates.

Lendio advises you to review the SBA guidelines and regulations on your own and determine your Company’s best approach to receiving SBA loans. Lendio urges you to consult your own attorneys, lawyers, and consultants to make the best decision possible. The information contained herein should not be construed as legal or tax advice, and should not be relied upon as such.

UPDATE: The PPP loan application period ended May 31, 2021. Apply for the Employee Retention Credit today through Lendio.

If you’re a 1099 worker (or a small business that employs 1099 workers) seeking a Paycheck Protection Program (PPP) loan, you likely have questions about whether or not you qualify for a PPP loan, what you need to apply, and how potential loan forgiveness will work. We’ve put together some of the most common questions we’ve received surrounding PPP and 1099 workers to give you the information you need. 

How Can 1099 Workers File for a PPP Loan?

Independent contractors can submit a PPP loan application through their bank or a lending marketplace. Given that many banks aren’t prioritizing the smallest loans, we’ve stepped up to help independent contractors secure funding. We’ve partnered with multiple PPP lenders to maximize your chances of funding, and we’ve streamlined the application to make it fast and simple. 

PPP applications opened for 1099 employees on April 10, 2020. 1099 employees are now eligible to apply for their own PPP loans through their banks or a loan marketplace.

Can 1099 Workers Receive a Second Draw?

Yes, qualifying independent contractors can receive an additional disbursement of funds by applying for a Second Draw. Just like the First Draw, a borrower can receive up to 2.5 times their monthly payroll costs through a Second Draw. To qualify you must meet the following criteria:

• Have received a First Draw through the PPP program
• Have used all First Draw funds (or plan to use them)
• Have used First Draw funds only for allowed uses
• Experienced a 25%+ reduction in revenue in 2020 compared to 2019

Will You Need to Provide Documentation to Prove a 25%+ Revenue Reduction for Second Draws?

Documentation proving revenue reduction is only required for loans over $150,000. It’s unlikely that most 1099 workers would have a loan more than that amount, given that independent contractors may only claim payroll for themselves (in addition to other payroll-related expenses) as a part of their payroll calculations and the SBA has capped salaries for individual employees at $8,333/month ($100k/year). It is likely that you will be required to certify this revenue reduction instead. 

What Documents Do 1099 Employees Need to Apply for a PPP Loan?

• 1099-MISC
• 2019 Schedule C, which is now required. If you haven’t yet filed a Schedule C, you must complete one and submit it with your 1099-MISC
• Your birth date
• A color copy of your Driver’s License (front and back)
• A voided check for your business bank account
• If you have 941 Quarterly Tax Filings (2019, 2020 Q1) or 944 Annual Tax Filings (2019), they should be submitted

You can visit our complete step-by-step guide to completing an application for full instructions. 

Why is a Voided Check Required in the Lendio Application?

A voided check is required to demonstrate business revenue deposits.

Will a PPP Loan for a 1099 Worker Be Forgivable?

If PPP funds are used for allowed uses during the covered period of the loan (the 24 weeks immediately following disbursement of funds), then a borrower will likely qualify for loan forgiveness. 

The SBA has streamlined the forgiveness with a one-page application for loans under $150,000. Additionally, for loans under $150,000, you will not be required to submit documentation on your forgivable expenses. Instead, you will be asked to certify that funds were used for forgivable expenses. 

Can You Receive Unemployment at the Same Time as Your PPP Loan?

No. PPP loans cannot be used for the same purpose as other government funds at the same time. So you cannot receive unemployment at the same time as you’re using PPP funds to cover lost payroll. 

If you are currently receiving unemployment, you will have to cancel it starting on the date your PPP loan is funded. If you are still suffering from lost wages after PPP funds have been exhausted, you can apply for unemployment through your state agency. 

Can You Choose the Start Date For the Loan?

You cannot choose the start date for the loan. The loan term begins the day you receive funds. 

Can a Small Business Include 1099 Employees in Their Payroll Calculations?

No, 1099 employees should not be included in a small business’s payroll calculations for their PPP loans. 1099 employees are considered their own businesses under the PPP. As of April 10, 2020, 1099 employees are eligible to apply for their own PPP loan. 

Why Does the Application Ask If You Have 1099 Employees If You Can’t Include Them?

Guidance for PPP loans asks if a small business was open as of February 15 and “had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on Form(s) 1099-MISC.” 

Treasury guidance regarding 1099 employees pertains to eligibility. You need to either have employees who receive a salary or 1099 employees who you pay in order to qualify for the loan. It does not pertain to loan size calculations. 

Lendio strives to provide you with the most current information as it relates to the Paycheck Protection Program, related SBA programs, and relevant regulations. The rules and regulations governing these programs are being regularly clarified by the SBA, and other agencies. In some cases, the provided guidance may directly conflict with other competing guidance, laws, rules, or regulations. Due to these changes, Lendio cannot guarantee that the information contained in this page reflects new changes or updates.

Lendio advises you to review the SBA guidelines and regulations on your own and determine your Company’s best approach to receiving SBA loans. Lendio urges you to consult your own attorneys, lawyers, and consultants to make the best decision possible. The information contained herein should not be construed as legal or tax advice, and should not be relied upon as such.

An SBA loan is intended to help a small business get up and running. This can be a risky endeavor, so the federal government provides them to help entrepreneurs who might not be able to get a loan under normal circumstances. It’s a powerful kickstarter for our economy.

The SBA doesn’t make any of the loans itself but makes it all possible by guaranteeing the loans made by other lending institutions. What usually happens in the case of a default is the lending bank will contact you and explain the details of the default and how to remedy it.

What Happens If You Default on Your SBA Loan?

In situations where you are unable (or unwilling) to make payments, the lender will begin the collection process as laid out in the SBA loan agreement. This may include the sale of assets you used to collateralize the debt, like business assets. For larger loans, maybe even your home and other properties. If you continue to fail to make payments, the lender can close the business and also foreclose on your property.

If it reaches a point where the lender has used all options for recovery, they’ll make a claim to the SBA. At this point, the SBA guarantee kicks in and the federal government will repay the lion’s share of the loan on your behalf.

With the lender paid, you would now be dealing with the SBA. You’d get a notice from the SBA, explaining that you need to pay the remaining balance or present an “offer in compromise.” An offer in compromise is a situation where the SBA will review your financial situation and perhaps accept less than is actually required. The key in these situations is for you to present a settlement amount that is substantial, but also sustainable given your finances. The SBA obviously has no interest in payment plans that you wouldn’t be able to meet.

If the SBA accepts your offer, then everyone will be happy as long as the repayments are made. In cases where the SBA rejects the offer, you usually have an opportunity to recalibrate and submit again. Other times, the SBA will simply send the account to the Treasury Department. At that point, the Treasury Department has a full range of collection options (like garnishing wages and taking tax returns).

You might still have the option to settle when the loan is with the Treasury Department, but it’s a tedious process. So it’s always better to find solutions at the beginning of the process, when the loan is still with the original lender. Think about it this way: would you rather deal with a nice woman at a bank named Mary, or a government agent who eats entrepreneurs for breakfast?

It’s important to remember that even if trouble arises, there’s life after default. Once you’ve settled the debt, you can move forward and focus on restoring your financial health. To make sure it’s truly in the rear-view mirror, you will need to make sure that you’ve resolved all the issues related to the defaulted loan. This is particularly true for SBA liens or judgments that might go unnoticed at the time, but could cause issues later.

You’ve reported your annual revenue, time in business, and credit score. You’ve provided bank statements, and you made it official by clicking “Submit” at the end of the Lendio application. If you’re anything like us, you may be refreshing your screen and wondering, “What comes next?”

We value transparency and giving business owners the power that comes from financial literacy, so we’re going to outline the steps to the best of our ability. “To the best of your ability,” you ask. “What does that mean?” Well, part of what makes our marketplace so special is that it relies on some pretty complicated tech to match you with the best options from our network of premium lenders. Because the experience is customized for each borrower, we can’t give a one-size-fits-all answer, but we can give you a general sense of what usually happens. So, where were we?

Step 1: Our Smart Application Matches You With Loans

After submitting an application, most borrowers will be matched with loan offers from our network of curated business lenders. Our tech analyzes your application and compares it against the 10+ loan products offered by the 75+ lenders in our network. In other words, our little internet robots do some pretty heavy administrative lifting to find you the loan offers you need as quickly as possible. 

In some cases, your application may not be a current fit for one of our lenders. If that happens, we’ll set you up with tools that can help you achieve the financing you need now and help you make your business more appealing to lenders down the road. Our mission is to fuel the American Dream, so you’ll never hear us say, “Tough luck.” 

Step 2: Funding Managers Provide Personal Attention and Expert Advice

“Every journey is a little different,” explains Kris Glaittli, Lendio’s Senior Director of Marketplace & RMT. For that reason, borrowers are then paired with funding managers, who are dedicated loan experts. After you’ve received your loan matches, you’ll probably receive a call from your funding manager. They’ll help you complete anything that’s missing from your application, and they’ll ask you some questions about your business. 

This information will help your funding manager better understand your financing needs so they can point you in the direction of the best financing option for you. “We really do try and match the borrower’s needs so it creates a unique experience,” Kris says. This call also allows your funding manager to address any potential red flags in your application. If you switched bank accounts a few months back or have any lawsuits, the funding manager will try to address it and make the case to the lender on your behalf. 

Step 3: Varies Based on the Lender

Once your funding manager has assessed your needs and helped you complete your application, the next steps vary from lender to lender. The order may change depending on the lender, but you can expect the following to (generally) happen:

• Your loan application will be submitted to the lenders
• The loan will go through the underwriting process
• You receive the loan offer from the lender
• You may have a phone call with the lender, called the merchant interview (if this happens, it’s usually right before funding)

Step 4: Receive a Decision

Finally, you’ll receive a decision from your lender. If you’re approved, you may receive funds in as little as 24 hours, depending on the loan type. If you’re denied, no sweat. You can still apply to other lenders without creating a new application. That’s the beauty of a marketplace.

Minority-owned businesses likely play a significant role in your local economy. According to the US Senate Committee on Small Business and Entrepreneurship, there are over 4 million minority-owned businesses in the United States, with sales totaling $700 million. 

Over the last 10 years, these businesses accounted for 50% of the 2 million businesses started in the US, and they created 4.7 million jobs. Look around—the reason your city continues to grow is likely because of the success of these minority-owned small businesses.   

You can support minority-owned businesses as a consumer and as a business owner. Check out these 7 ways you can help them grow. 

1. Buy from them.

The easiest way to support a minority-owned business: buy their goods and services. Whether you’re shopping at a local coffee shop or hiring a florist for your wedding, you can choose to give your business to a minority-owned establishment. 

Supporting communities of color builds up diverse neighborhoods and furthers the pursuit of equitable prosperity. The money you spend here will not just help build diversity—it will also stay with local businesses, which furthers wealth within your community.

2. Skip services that take profits from companies.

This is a rule of thumb that applies to almost any small business: avoid using services like UberEats or Shipt when buying from minority-owned businesses. Instead, see if they have their own local delivery service or pick up the goods yourself instead. 

National services like DoorDash can take up to 30% of the profits on an order—meaning your support might not stretch as far as you planned. Buying local also includes shipping or delivering services. 

3. Promote their goods in your business.

If you work with different vendors to keep your business afloat, look for ways to hire minority-owned companies and promote their products. For example, a breakfast restaurant could serve coffee by a minority-owned roaster or pastries by a minority-owned baker. This partnership advertises their business, grows your selection, and spreads wealth across both of your businesses. 

4. Write online reviews for minority-owned businesses.

Feedback in the form of online reviews is one of the best ways for you to support a locally run minority-owned business.

If you had a great experience, leave a positive comment on Google, Yelp, Facebook, or other review sites. Share photos if you have them. This act might seem small, but you can increase their visibility online and help grow their business—plus it won’t cost you anything beyond a few minutes of your time.  

5. Sponsor a minority-owned business through the Chamber of Commerce.

According to the Minority Business Development Agency (part of the US Department of Commerce), there are almost 2.6 million Black-owned businesses in the United States. About 110,000 of them have employees. 

This statistic means that 96% of Black-owned businesses are individual entrepreneurs or partnerships without employees. These small businesses often miss out on networking opportunities because they can’t afford the fees associated with joining professional organizations or the local Chamber of Commerce. 

If you are involved in any dues-based organization, offer to sponsor a minority-owned business. This support gives these business owners seats at the table to reap the same benefits as larger, wealthier organizations in your area. 

6. Offer sliding scale services.

While the value of your services as a business owner remains the same, not everyone can afford to pay for what you do. Some service providers—like accountants, marketers, and web designers—offer a “pay what you can” program for nonprofits and minority-owned companies.

This flexibility can significantly benefit minority-owned business owners. For example, many small business owners also take on tasks related to their business’s accounting and taxes. If they had better bookkeeping or were able to take advantage of more tax opportunities, then they could become more profitable. Making your accounting services available in these scenarios could take the financial pressure off the owner and allow them to focus on growing their business.

Offering your services on a sliding scale can help you support minority-owned businesses that need your services but can’t afford them right now.  

7. Support internal workforce diversity.

You may not realize it, but prioritizing diversity in your workplace can help you support minority-owned businesses in your area. Your diverse employees support others in the community and can promote other minority-owned businesses not on your radar. A diverse workplace can also benefit your business: you gain fresh perspectives and new ideas when your team members come from different backgrounds. 

That being said, you should never expect your employees of color to serve as ambassadors to their communities or put the burden entirely on them to explain race-based issues to you. That would be an unfair request—and a responsibility that your white team members would never have to face. 

8. The Buy Black movement.

The #BuyBlack movement spotlights Black- and minority-owned businesses. “I became aware that many Black-owned businesses have purposely not shown their faces in fear of losing customers, this is me included,” Maggie Foster, CEO of ClaudeHome, a boutique design firm in NYC, told TeenVogue.  “I’m working on having anyone that has also felt this way to come together and have our photos taken so we can show the world our beautiful faces. As a Black person that has experienced racism and injustice throughout my life, I am so thankful to have the platform I do to spread awareness and educate others.”

“Buying Black” has become as much of a values-driven choice as buying green, shopping small, or buying American. My Black Receipt, an initiative started by Kezia Williams, hopes to turn buying Black from a trending hashtag into a longer-term movement by tracking purchases for Black-owned businesses. "When you invest and purchase from a Black-owned business, what you're really doing is strengthening the Black community," Williams told CNN. Consumers can upload their purchases into the database, which Williams and her team will use to track the impact of consumer spending on Black-owned businesses, as well as partner with organizations like Yelp to help people find minority-owned businesses more easily.

To find a local business to support, check directories like the one on My Black Receipt, BlackPages, or Official Black Wall Street. Other lists can be found by industry, like Bon Appetit’s list of Black-owned restaurants across the country or Beyonce’s Black Parade list.

If you do make a purchase, write a review. Online reviews matter nearly as much as word-of-mouth for online purchases, so writing a review on a platform of your choice can help make your purchase go that much further.

9. The 15% Pledge.

Supporting minority-owned businesses isn’t limited to consumer purchases. Evaluate your entire supply chain, from the influencers you follow to where you source your office supplies. 

That’s exactly why Aurora James, founder and creative director at accessories company Brother Vellies, created the 15% pledge. She called out Target, Sephora, Net-a-Porter, Walmart, Whole Foods, and Shopbop, among others, to diversify their suppliers. “This pledge is not prescriptive, because we understand that each business, each milestone, each change, is unique,” says the 15% Pledge website, urging businesses to “Define and publish a plan for growing the share of Black businesses you empower to at least 15%, alongside a concrete strategy by which you plan to stay accountable to and transparent around your commitment.”

The nonprofit spun out of a viral Instagram post in response to performative and empty social media campaigns made by retailers with no plans to change but eager not to be left behind by popular sentiment.

Sephora became the first major US retailer to take the pledge. Currently, out of 290 brands it offers, only 9 are Black-owned. “We are inspired to make the 15% Pledge because we believe it is the right thing to do," Artemis Patrick, Sephora's executive vice president and chief merchandising officer, told CNN. This move is part of a longer-term plan to change their supply chain and help more minority-owned businesses grow.

Rent the Runway also signed the pledge, telling the New York Times, “We’re collectively reckoning with the fact that for far too long, fashion has co-opted the style, inspiration, and ideas of Black culture without ensuring that the people behind the work are properly compensated.”

Often, word-of-mouth largely determines which brands show up on shelves. Merchandising teams often start with what they’re personally familiar with, and brands pick up steam from there. The important thing is not only giving shelf space but marketing and partnership space, too.

10. Invest in minority businesses.

The average entrepreneur is a 35-year-old white male with a degree from an elite university and the youngest of a wealthy family. Centuries of discrimination mean it’s less likely minorities have the kind of inherited generational wealth many white entrepreneurs tap into when they look to start a business. Research also shows that minorities are less likely to be approved for loans or receive investments due to lower collateral, location bias, and credit history.

In a survey released by Morgan Stanley in 2018, 80% of investors agreed that women- and minority-owned businesses received enough funding to run their businesses when only 18% said they “very frequently” review minority-owned businesses. 

Talk about a blind spot.

This blind spot is caused by several factors, with investors citing higher risks for businesses owned by minorities, lack of familiarity, and lack of access to traditional investors in the first place. “Multicultural and women-owned businesses could account for $6.8 trillion in gross receipts if they matched their percentage of the labor force and business revenues were equal to traditional firms,” states the report. “This would represent nearly 3x the current output, with a missed opportunity of $4.4 trillion.”

Everyone can do their part.

You don’t need to have a large business in your town or city to support minority-owned companies. By simply being cognizant of where you spend your money and who you support, you can elevate hard workers and impressive brands in your neighborhood.

Small businesses nationwide are struggling with the fallout from the coronavirus crisis. New research suggests that 50% of business owners have felt the effects, and nearly 40% report a decline in revenue. These negative trends were mainly chalked up to fewer customers visiting business locations, customers being more reluctant to make purchases, and customers having access to less disposable income.

Given the dire situation, the federal government is taking unprecedented action. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will allocate $2 trillion for relief initiatives. Included in the package will be a one-time payment to many Americans. Individuals making up to $75,000 a year will receive a $1,200 payment. Married couples making no more than $150,000 will get $2,400, as well as a $500 payment for each child in their family.

SBA disaster loans get a boost.

In addition to the personal payments from the relief package, there are multiple benefits for small businesses in the CARES Act. These include:

• Paycheck Protection Program (PPP): Get up to $10 million to cover payroll support expenses such as employee salaries, paid sick leave, paid medical leave, insurance premiums, mortgage payments, rent payments, and utility payments.
• Economic Injury and Disaster Loan (EIDL) and Loan Advance: These loans are specifically relevant in situations where your business didn’t suffer any physical damage but was harmed nonetheless. You can receive up to $2 million to cover expenses you would’ve been able to pay if the disaster hadn’t occurred. Because of the severity of the coronavirus pandemic, you can actually apply for an advance of up to $10,000.
• SBA Debt Relief: With this program, the SBA pays the principal and interest on new SBA 7(a) loans that are funded before September 25, 2020. If you have an existing SBA 7(a) loan, the SBA would pay the principal and interest for 6 months. Note that this benefit is limited to SBA 7(a) loans and wouldn’t be applicable for PPP loans or EIDLs.
• SBA Express Bridge Loan: With values up to $25,000, these loans require less paperwork and hit your bank account much faster than a typical SBA loan. This program is intended to deliver faster relief to those who need it.

Businesses can qualify for the expanded Small Business Administration (SBA) disaster loan program as long as they don’t employ more than 500 people. As with other SBA loans, this financing is not actually funded by the agency. Rather, the COVID-19 loans are facilitated by the SBA, and the money comes from banks and various independent lenders. The key element is that the SBA guarantees a portion of the loan, which lowers lenders’ risk and makes them more willing to work with those who have less-than-stellar credit history.

SBA small business loans are intended to help small business owners overcome the negative effects of the coronavirus pandemic, so if you’ve struggled to make payroll, cover accounts payable, handle fixed debts, or pay your bills, you could qualify.

Finally, the Families First Coronavirus Response Act could also help you during this challenging time. This federal action bolsters unemployment benefits and creates rules for emergency paid sick leave impacted by the pandemic.

The regular lineup of SBA disaster loans.

Multiple other SBA emergency loans for small businesses are available. While the details vary, they are all intended to help a business after physical or economic damage is caused by a declared disaster.

An SBA disaster loan can be used to repair or replace real estate, personal property, machinery and equipment, and inventory and business assets. But don’t go thinking that you could use one to expand your operations. The rules clearly state that it’s only intended to restore things to the way they were before the disaster.

Here’s a quick look at 3 different types of SBA disaster loans not directly related to federal action in response to the coronavirus crisis:

• Home and personal property loans

For those living in a declared disaster area and who have been victims of a disaster, there may be relief available through these loans. It’s worth noting that even though these loans are provided through the SBA, you don’t need to actually own a business to qualify.

• Business physical disaster loans

If your business or organization is within a declared disaster area and sustained damage during that disaster, you can apply for one of these loans. Common examples include a hurricane or flood. These loans provide up to $2 million and are intended to help you replace or restore any damaged property.

• Military Reservist Economic Injury Disaster Loans

This loan is specifically earmarked for business owners who employ a military reservist called to active duty. In these situations, the SBA funding can help your business with operating expenses.

Current declared disasters.

In order to qualify for SBA assistance for more regionalized physical disasters, you will need to live in a designated disaster area.

You can search for Presidential and SBA declared disaster areas by state and territory with the SBA’s online database. Recent examples include flooding in Tennessee and Mississippi, wildfires in Hawaii, and Hurricane Idalia.

Once a Presidential disaster is declared in your area, you need to first register with the Federal Emergency Management Agency (FEMA). To get started, call FEMA at 1-800-621-3362 or visit DisasterAssistance.gov.

After you’ve gotten a registration number from FEMA, you’re ready to complete your SBA online application. You’ll need to have the following information handy:

• Contact information for all applicants
• Social security numbers for all applicants
• FEMA registration number
• Deed or lease information
• Insurance information
• Financial information such as income, account balances, and monthly expenses
• Employer Identification Number for business applicants

The SBA will review your application and then send an inspector to do an onsite review and to estimate the cost of your damage. The SBA makes these disaster loans a priority, so you can expect to hear back on their decision within a few weeks.

One thing to note is that the most commonly cited reason for delays in the process is an incomplete application. With this in mind, spend a little extra energy making sure every detail is correct before you click submit.

Also, don’t wait for any insurance settlements before you file your loan application. This common delay can cause borrowers to miss the filing deadline. If a settlement is made after you’ve applied, you can simply add the final insurance information at that time.

While every effort is made to ensure the accuracy of information when a story is published, the coronavirus pandemic and Paycheck Protection Program (PPP) have caused details to change at a rapid pace. Additional guidance from the government may change or clarify certain aspects of the forgiveness process and could result in changes to the information contained in these pages. For the most up-to-date information, please visit the COVID-19 section of our website. For more information, you can call us at (855) 853-6346. Lendio is not responsible for and provides no warranty as to the accuracy of this content. Lendio does not provide legal, accounting or tax advice. The information and services Lendio provides should not be deemed a substitute for the advice of such professionals who can better address your specific concern and situation.

A

accounts payable: Money a company owes to vendors, suppliers, or lenders. 

accounts receivable: Money owed to a company. Think outstanding invoices. 

accounts receivable financing: Enables companies to borrow up to 80% of the value of their outstanding accounts receivable, giving business owners cash flow to cover expenses like payroll. 

accruals: Business expenses that have been incurred but are not on the books yet or work that has been done, but not invoiced. 

ACH payments: Payments made through the Automated Clearing House (or ACH) Network. ACH payments are made when one party gives another authorization to deposit or withdraw funds directly from a bank account—commonly used in direct deposit for payroll or automated payments for bills and loans. 

amortization: The process of spreading out a loan into a number of fixed payments over time. Your total payment stays the same each month. The percentage of principal vs. interest that makes up the payment fluctuates. 

angel investor: An individual who invests in a business at the startup stage, often in exchange for equity or convertible debt. 

annual fees: Fees that can be charged by the lender each year to cover the administrative costs of a loan. Most often seen with lines of credit or business credit cards. 

APR: Annual percentage rate. This is the annual cost of your loan. It includes the interest rate and any other costs assessed, such as origination fees.

articles of incorporation: The set of formal documents filed with a government body—usually your state— that documents the creation of a company. Think of it as the marriage or birth certificate for your business. 

asset: Something of value that you own. Appreciating assets like stocks tend to increase in value or in their ability to produce income. Depreciating assets like cars lose value over time.

asset-based lending: A loan or revolving line of credit that uses a company’s assets as collateral. This can encompass receivables along with assets like equipment, real estate, inventory, and raw materials. 

All good things must come to an end. This classic saying applies to everything from steak dinners to perfect sunsets, and it certainly has relevance to business partnerships.

There are positive scenarios for business breakups, such as a partner retiring or moving on to other opportunities in their life. On the flip side, there are also more volatile situations where personality differences, deception, or other factors that lead to the dissolution of partnerships. Unfortunately, in times like these, it can get ugly.

It’s important to remember that it's a process that has been happening since the first smelting businesses formed thousands of years ago during the Bronze Age. So if you’re in the midst of a partnership breakup and it feels overwhelmingly difficult, know that there’s a path forward and you’ll be fine.

“Selling to a partner is often one of the easier transfers to handle legally—not that partners don't have their battles and disagreements—but most buying partners want to make the transition smooth and get the selling partner out quickly and painlessly,” says attorney Mark J. Kohler. “Many times, I feel that partners are amenable and anxious to define the transaction and process so that they themselves can utilize the same method with a good conscience in the future.”

While it’s true that buyouts can be smoother than business-related transfers, it’s always advisable to do your due diligence and proceed with caution. This process starts with consulting an attorney that handles acquisitions. The attorney can help you understand the nuances of your state’s business partnership laws and form a proper strategy.

The goal at this stage is to outline the process and identify potential risks. Because make no mistake—a buyout always contains risks. And having a third-party expert involved is a proven way to mitigate them.

Here are 5 more steps to buying out a business partner:

1. Get an independent valuation

Before you can buy or sell anything, you need to know its value. You and your partners will likely each have some personal thoughts on the matter of valuation, so using a trusted firm to handle the valuation is always recommended.

To ascertain the value of your business, these third-party experts will estimate your future profits and correlate that with the projected rate of return.

2. Get on the same page

Once the firm has finished their evaluation process, you’ll have a solid foundation as you work to negotiate a buyout price that’s fair for all parties. These can be delicate conversations, so it’s helpful to have independent data available.

At the same time, remember that business valuations aren’t an exact science. There are myriad factors that are difficult to account for, yet play a role in the situation. For example, if your partner has decades of experience and plays a critical role in the business, they might ask for a higher buyout amount due to their prominent position. But you would also need to consider the decrease in valuation that could occur with the loss of their expertise, guidance, and connections.

Strive for fairness at this stage in the game because business valuation discussions can easily escalate into angry stalemates. To keep things progressing, as well as enhancing their company’s equity value, many buyers will acquiesce somewhat to the selling partner and accept a higher amount than they’d prefer.

3. Keep your options open

Both business valuations and former business partners can be unpredictable. It’s important to stay flexible throughout the process so you don’t find yourself holding the wrong basket, fully loaded with eggs.

Your attorney can help you navigate the process as it unfolds. Perhaps you’ll dissolve the partnership, rewrite the partnership agreement, or continue with the buyout. The important thing is that you react to each development strategically.

4. Organize your financing

Most buyers simply aren’t in a position to pay their partners in cash. For this reason, it’s important to check out the various debt financing options and see what works for your needs. Loans from the Small Business Administration are often thought of as some of the best for this kind of transaction.

You’ll also need to determine the structure of your financing. With a buyout over time, you’ll pay set amounts of money to your former partner over time until the purchase is complete. With an earnout, the selling partner would also be paid over time, with the added condition that they stay with the company for a transition period to help improve sustainability. And lump-sum payments are just what they sound like, with a single transaction occurring and the selling partner immediately stepping away from the business.

5. Handle the details

After you’ve settled on the best way to progress, be sure to do so carefully. Lean on your attorney whenever you have questions or encounter challenges. Your attorney will take care of drafting the agreement to release your partner’s liability. Additionally, the attorney will prepare the other necessary paperwork so you can file all the correct documentation at the local, state, and federal levels.

You’ll also need to transfer various accounts that are in your partner’s name. Each time you do this, take the time to reset the passwords on the online portal. This step isn’t done to show disrespect for your former partner but to start again with a clean slate.

As you follow these steps, you’ll help ensure your buyout is as respectful as it is uneventful. Even the most friendly of partners can get their feelings hurt in this process, so the more you can do to keep it professional and streamlined will pay dividends in the end.

If things do become hostile, try not to take it personally. Your former partner is likely going through a major upheaval in their life. This is truly a time where patience is a virtue. Rely on your attorney and other third-party experts to help insulate you whenever possible, and thoughtfully make your way through this process so you can emerge triumphant on the other side without any collateral damage.