Do You Need a Business Loan Cosigner?
For instance, you may apply for a loan and get denied or offered a high rate and unfavorable terms. The good news is a cosigner can sign for a loan and help you avoid this situation.
In this post, we’ll review what a business loan cosigner is and the pros and cons of having one.
What is a Loan Cosigner?
A business loan cosigner adds their name to a primary borrower’s loan application. They agree to pay back the loan amount plus any additional fees in the event the borrower is unable to repay their debt.
If you can’t qualify for a loan on your own or would like to increase your chances of securing a loan with a competitive interest rate and favorable terms, a cosigner may be a good option.
Ideally, the cosigner you choose is someone you trust with a good to excellent credit score. A cosigned loan differs from a joint loan because the co-signer will not be able to access the funds even though they may be responsible for repaying them.
Can I Benefit From a Small Business Loan Cosigner?
There are some situations in which a business loan cosigner makes sense. If any of the following apply to you, you may want to consider one.
- You Have Bad Credit History:
If you have poor credit rating or a track record of delinquencies, liens, or bankruptcy, a business loan cosigner may be the only way you get approved for a loan. Just make sure the cosigner you choose has good or excellent credit and has proven themselves to be a responsible borrower.
- You Would Like a Larger Loan Amount:
It can be expensive to run your small business, so you may want to borrow more money than you can get approved for on your own. If this is the case, a cosigner can help, especially if they can show they have the money to repay the loan.
- You Don’t Want to Put Up Collateral:
Many lenders require collateral to guarantee a business loan. This can put your commercial property, equipment, or other valuable assets at risk. A cosigner with enough income to pay off the loan can reduce or eliminate the need for collateral.
The Pros of a Business Loan Cosigner
If you secure a cosigner, you can reap the following benefits:
- Increased Odds of Approval: If you don’t have the best credit, a cosigner can boost your likelihood of loan approval. You may find it difficult to qualify for financing without one.
- Lower Interest Rate: A cosigner can help you lock in a lower interest rate than you’d be able to get by yourself. With a lower rate, you can save thousands of dollars over the life of your loan.
- Better Terms: You may be forced to repay your loan fairly quickly if your credit score is on the low side. A cosigner can help you get approved for longer repayment terms that align well with your budget and needs.
The Cons of a Business Loan Cosigner
The drawbacks of a small business loan cosigner include:
- Collateral May Be Required: Depending on the lender and loan type, your cosigner may have to provide collateral, which is an asset like a piece of property. The lender will sell the collateral if the loan goes into default.
- Potential Damage to a Personal Relationship: If a family member or close friend cosigns your loan and is forced to repay it because you fail to do so, your relationship may take a hit.
- Higher Risk of Debt: Since a cosigner can make it easier for you to get approved for a loan with a higher amount, you may steer your business into a cycle of debt. This is particularly true if you don’t make your business loan payments on time and in full.
Alternatives to a Small Business Loan Cosigner
If you decide that a business cosigner isn’t right for your situation, consider these alternative options.
- Improve Your Credit: Take the time to boost your credit score. Make timely payments, pay off your debt, and hold off on opening new credit accounts. Of course, this is only a good idea if you can wait for financing and don’t require it immediately.
- Look for Business Loans for Poor Credit: If you need the money sooner rather than later, do some research and find lenders who offer business loans for poor credit. Keep in mind that if you go this route, you’ll likely be stuck with a high interest rate and costly fees.
Conclusion: Be Careful Before You Select a Cosigner
A cosigner may seem like the ideal way to get approved for a loan with a low rate and great terms. However, before you move forward with one, consider the pros and cons. Also, we suggest exploring alternative financing options.
In the event you decide a cosigner is the best choice for you, do your best to repay the loan yourself. This way you can avoid a damaged relationship and improve your credit simultaneously.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.