If you have a poor personal credit score, or a lacking credit history, then applying with a cosigner for a business loan can make a lot of sense. Having a cosigner can increase your chances of qualifying for a lower interest rate and help you meet your lender’s collateral requirements.
Can I get a cosigner on a business loan?
You can use a cosigner on a business loan as long as your lender accepts cosigners. 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 if you fail to repay, like a back up payer. Lenders also refer to cosigners as guarantors.
Most lenders don’t 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.
When to apply with a cosigner
A cosigner on a business loan may be a good idea when:
- Your credit score is too low to meet most minimum requirements — typically below 650.
- You don’t have the personal assets to back your loan.
- You want to be approved for a higher loan amount.
- You want to avoid providing collateral or a personal guarantee.
- You want to qualify for a lower interest rate.
However, a cosigner may not help if your business can’t meet revenue or time-in-business requirements.
How to apply for a business loan with a cosigner
Getting a business loan with a cosigner isn’t difficult, here are the basic steps:
- Compare lenders. Most lenders won’t advertise if they accept cosigners, and you may not know if you need a cosigner until after you apply. However, it’s still a good idea to compare business loans by rates, loan amounts and credit score requirements. There are also business loan marketplaces, such as Lendio, that allow you to compare over 75 lenders.
- If you need a cosigner, find one. Lenders typically only allow relatives or close business affiliates, like an investor or senior employee, to cosign a business loan. The ideal cosigner 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.
- You and the cosigner apply. The cosigner goes through the application process with you, providing proof of income, assets, work history, go through a credit check, etc. The cosigner signs all the application documents with you.
- Final steps. If you’re approved for the loan, you and the cosigner sign all the loan documents. The cosigner is only contacted to repay the loan if you’re unable to.
The cosigner is pretty hands-off after approval. Typically, the cosigner is only contacted if you miss payments, in which case, the lender asks them to start repaying the loan.
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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 ways lenders treat 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 are 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 much help unless they can provide collateral.
What should my cosigner’s credit score be?
Generally, cosigners should have a credit score of 680 or higher to cosign a loan — that’s the minimum for many business lenders. If the cosigner is putting assets up for collateral, a 680 is typically fine. But if you need a credit score boost, consider finding someone with a credit rating of 740 or higher.
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
Getting a loan with a guarantor isn’t always a better alternative compared to securing your business loan with collateral.
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 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 higher 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.
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