If your credit score isn’t strong or your credit history is limited, getting approved for a business loan can be tough.
Finding a cosigner could help. By sharing responsibility for the loan, a cosigner can improve your chances of approval and even help you qualify for better terms, like lower interest rates or less need for collateral. Here’s how it works and when getting a business loan with a cosigner might make sense.
Yes, you can, as long as your lender allows it. A business loan cosigner is someone who agrees to step in and repay your loan if you can’t. They’re legally responsible for the debt, just like you, and some lenders may also refer to them as guarantors.
However, many lenders don’t openly advertise whether they accept cosigners. It often comes up after they’ve reviewed your application, considering things like your business’s finances, your credit history and any collateral you’re offering. If these factors fall short, they might suggest adding a cosigner to strengthen your application.
A cosigner on a business loan may be a good idea when you:
However, a cosigner may help your approval odds if your business doesn’t meet the lender’s revenue or time-in-business requirements.
Getting a business loan with a cosigner can be straightforward. Here are the basic steps:
The role of the cosigner is pretty hands-off after the loan has been disbursed. 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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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.
Your cosigner’s impact on your application depends on the method your lender chooses. There are generally three ways lenders treat cosigners on your application:
The best credit and nonweighted average methods benefit your business most — especially if you don’t have strong personal credit. But if your lender uses the weighted average method, applying with a cosigner won’t help much unless they can provide collateral.
In most cases, a cosigner needs a credit score of at least 680 to meet the requirements of many business lenders. However, if your goal is to significantly improve your chances of approval or secure better terms, aim for a cosigner with a credit score of 740 or higher. A stronger credit profile can make a big difference in how lenders view your application.
Getting a loan with a cosigner isn’t always a better alternative than securing your business loan with collateral.
A cosigner can provide support without tying up your assets, but it also comes with the risk of straining personal relationships — no one wants to jeopardize a loved one’s credit score or financial standing. And if you’re borrowing with a lender that uses the weighted average method, putting up collateral could have a greater impact on your application than using a cosigner alone.
But sometimes your assets aren’t as valuable as you think — vehicles lose value over time and the real estate market isn’t always predictable. If you don’t have enough assets to back the loans on your own, a cosigner might be the better option. Even under weighted credit scoring methods, their collateral could help you secure the funding your business needs.
If adding a cosigner isn’t the right fit for you, there are plenty of other ways to fund your business. Here are some options that don’t require a cosigner and could still help you get the financing you need:
These alternatives can provide the funding you need without the added responsibility of involving a cosigner. Each option has pros and cons, so it’s worth exploring which ones best suit your business.
Bringing on a cosigner can sometimes give your business loan application the boost it needs to get approved for higher amounts and lower rates. A cosigner 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.
The SBA doesn’t allow cosigners for its business loans but requires personal guarantees from any individual with at least 20% ownership in the business. A personal guarantee means the business owners are held personally responsible for repayment.
No, an LLC typically cannot act as a cosigner for a business loan. Lenders require a cosigner to be an individual because the cosigner is personally responsible for repaying the loan if the primary borrower defaults.
If you default, the lender turns to your cosigner for repayment because they’re equally responsible for the loan. Default also leads to a lower credit score for both you and your cosigner, which will likely put a strain on your relationship.
Cosigning a loan comes with big risks. If the borrower doesn’t make payments, the cosigner is legally on the hook to repay the loan, which could place you under a heavy financial burden. Late payments or defaults can also hurt the cosigner’s credit score, making it harder to qualify for loans or credit cards in the future. If collateral is involved, the cosigner’s assets could be seized if the loan isn’t paid.
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