Can’t qualify for a loan on your own? Here’s when it might be a good idea to borrow with a guarantor for your business.
When is it best to apply with a cosigner?
Getting a cosigner can help when your personal credit is poor and could hurt your business loan application. It’s also a good idea when you don’t have the personal assets to back your loan. However, it won’t necessarily help if your business can’t meet revenue or time-in-business requirements.
How can applying with a cosigner help? First, it can help increase your chances of getting approved if your credit score is too low to meet most minimum requirements — typically below 650. It can also help your business be approved for higher amounts when you just eek by the credit score minimum.
Bringing on a cosigner can help your business avoid providing collateral or a personal guarantee. A cosigner lowers the risk of default on the loan, which is typically the purpose of a lender requiring collateral. Your cosigner can also help you meet your lender’s collateral or personal guarantee requirements by backing your business’s loan with their assets.
How does applying with cosigner work on a business loan?
Applying with a cosigner works a little differently with business loans than with personal loans. That’s because it’s typically up to the lender to decide whether or not your application could benefit from a cosigner — not the borrower.
In fact, most lenders don’t even advertise if they accept cosigners. In many cases, a lender might suggest bringing on a cosigner after reviewing factors like a business’s financials, credit ratings and assets of all business owners and any collateral.
What's a cosigner?
A business loan cosigner is someone who signs a document guaranteeing they’ll repay your loan if you can’t. That means they’re as legally responsible for paying off the loan as your business. Lenders also refer to cosigners as guarantors.
When it comes to business loans, lenders typically only allow relatives or close business affiliates — like an investor or senior employee — to cosign a loan. The ideal cosigner also has excellent credit, a low debt-to-income ratio and a steady income. They should be able to comfortably afford covering your business’s loan repayments.
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How do lenders evaluate cosigners?
In general, lenders consider your cosigner’s credit score, net worth and debt-to-income ratio when considering your application. Some might also ask your cosigner to put assets up for collateral — typically enough to back all or part of your loan.
The impact your cosigner has on your application depends on the method your lender chooses. There are generally three different ways lenders treats cosigners on your application:
- Best credit method. The lender only considers the best credit profile and completely disregards the lower credit score.
- Weighted average method. The lender puts more weight on the business owner’s credit than the nonowner’s credit.
- Nonweighted average method. The lender considers your and your cosigner’s credit equally.
The best credit and nonweighted average methods could be the most beneficial to your business — especially if you don’t have strong personal credit. But if your lender uses the weighted average method, applying with a cosigner won’t be of much help unless they can provide some collateral. And even then, you might not want to — they’ll be putting their assets at risk for little reward.
Pros and cons of business loans with cosigners
- Can help you qualify with more lenders.
- Potentially qualify for larger amounts.
- Possibly lower interest rates and fees.
- Can hurt your cosigner’s credit if you default.
- Might get approved for a loan with repayments your business can’t handle.
- Could still require collateral.
Using a cosigner vs. collateral
Sometimes getting a loan with a guarantor isn’t always a better alternative to securing your business loan with collateral. For one, putting up collateral can save your personal relationships — there’s no risk of damaging your brother’s credit score or getting his car repossessed. And if you’re borrowing with a lender that uses the weighted average method, putting up collateral could have more of an impact on your application.
But sometimes your assets aren’t as valuable as you thought — vehicles can lose value over time and the real estate market isn’t always predictable. If you don’t have the means to back your loans on your own, using a guarantor could be a good choice. In this case, even if your lender uses the weighted average method, your cosigner’s collateral could help your business qualify for the loan it needs.
Bringing on a cosigner can sometimes give your business loan application the boost it needs to get approved for high amounts and low rates. A guarantor can also help back your business loan by putting their personal assets up for collateral. However, there’s the risk of hurting your cosigner’s credit score — and possibly your personal relationship. And your business could end up biting off more than it can chew, and risk default.
Want to learn more about how business loans work? Check out our business loans guide, where you can compare lenders and narrow your search for financing that fits your business’s needs.
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