How to get a business loan with a cosigner

Enlisting a business loan cosigner could help you get approved for financing to grow your company. You may even be able to qualify for better rates and larger amounts when you apply for a business loan with a cosigner. Find out more about when your lender may ask you to apply with a cosigner, and learn how the process works.

Why do I need a business loan cosigner?

Your lender may request that you get a business loan cosigner if you have a low credit score or you can’t secure your loan with collateral such as your home or vehicle. Your cosigner offers a guarantee to your lender that they will take on your payments in the event that you default. This gives your lender reassurance that the money you borrow will come back to them – even if it’s not you who ends up repaying the loan.

When will I need to apply for a business loan with a cosigner?

You may be asked to take out a business loan with a cosigner in the following situations:

• You have a low personal credit score. You could have to enlist a business loan cosigner if you have poor or bad credit, which is often defined by a credit score that sits below 660.
• You don’t have assets to secure your loan. Signing up with a business loan cosigner may allow you to qualify for an unsecured loan if you don’t have any assets to offer up as collateral for a secured loan.
• You need to borrow a large amount. You could be required to apply for a business loan with a cosigner if you’re asking for $15,000 or more. Just remember that the more money you request, the harder it will be to qualify.
• You don’t want to put up collateral. Asking a friend or family member to cosign your business loan can help you avoid using your assets to secure your loan – which means you can’t lose them if you default.

How does applying for a business loan with a cosigner work?

Applying for a business loan with a cosigner works a little differently than applying for a personal loan.

• Personal loan. When applying for a personal loan, the lender often expects that you (as the borrower) will identify when you need to enlist a cosigner for your loan. This means that it won’t be a condition of loan approval in many cases.
• Business loan. When applying for a business loan, the onus is on your lender to decide if your application could benefit from a cosigner. For this reason, most lenders don’t even advertise if they accept business loan cosigners.

• What will my cosigner need to get verified with my lender?

  Your business loan cosigner will usually be required to submit to a credit check and show proof of income and citizenship to sign up as your cosigner. They may also be required to put up some form of collateral such as their home or vehicle to secure your loan. The bank can then use this to recover its money if you default on your loan.

Process for getting a business loan with a cosigner

Follow these steps to apply for a business loan with a cosigner:

1. Talk to your lender. Find out if you have to enlist a cosigner as a condition of your loan. You may also be able to voluntarily ask someone to sign up with you to get lower interest rates or to qualify for higher amounts.
2. Ask around for a cosigner. Talk to your friends or family members to find out who might be willing to cosign for you. Keep in mind that they must have an excellent credit rating and enough income to cover your payments if you default on your loan.
3. Your lender will verify your cosigner. Visit your lender to get your cosigner verified, which usually involves a credit check and a full assessment of their finances. They may also need to put up assets to help secure your loan.
4. Sign documents with your cosigner. Your cosigner will sign your loan documents alongside you, which involves asserting that they will take over your payments if you default on your loan.
5. Keep your cosigner in the loop about repayments. You may want to keep regular communication with your cosigner to make sure they know if you’re having any issues with repayment. This way, the lines of communication are open and they won’t be caught off guard if you default on your loan.

Dive deeper: Compare business loans available in Canada

How do lenders evaluate cosigners?

Lenders usually consider your cosigner’s credit score, net worth and debt-to-income ratio when assessing your application. Some might also ask your business loan cosigner to put assets up as collateral, which will then be used to back all or a portion of your loan.

How will my cosigner impact my application?

The impact your business loan cosigner has on your application will depend on how your lender assesses their creditworthiness. There are generally three different ways lenders assess cosigners on your application:

1. Best credit method. The lender only considers your cosigner’s credit score and disregards your score completely (assuming it is lower). This is ideal if you have bad credit and can’t qualify on your own.
2. Non-weighted average method. The lender considers your credit score and your cosigner’s credit score equally. You may still be able to qualify using this method, especially if your business loan cosigner has excellent credit.
3. Weighted average method. The lender puts more weight on your credit score as the business owner than it does on your cosigner’s score. This method won’t help you qualify for a business loan unless your cosigner is willing to put up assets to secure your financing.

Pros and cons of getting a business loan with a cosigner

Pros

• Higher chance of qualifying. You’ll be eligible to borrow with more lenders if you sign up for a business loan with a cosigner who has good credit.
• Larger amounts. You may be able to borrow more money if you enlist a business loan cosigner to bolster your application.
• Lower rates and fees. You could get much better rates for your loan if your cosigner has an excellent credit score and is willing to vouch for you.

Cons

• Your cosigner could suffer. Your cosigner could take a hit to their credit score or lose their assets if you default on your loan.
• You may still need collateral. You could still be required to put up assets to secure your loan, even if you have a cosigner.
• Higher chance of defaulting. Enlisting a cosigner could put you at risk of getting a loan that you can’t handle repaying on your own.

Using a cosigner vs securing your loan with assets

Getting a loan with a cosigner may not make sense if you can secure your business loan with collateral.

	Benefits	Drawbacks
Enlisting a cosigner	No need to risk your assets Good rates and terms	Could damage your relationships Can be hard to find a cosigner
Using collateral	No need to ask for outside help Good rates and terms	You risk losing your collateral Not feasible unless you own valuable assets

What’s the difference between a cosigner and a guarantor?

The difference between a cosigner and guarantor is the degree of liability that the person cosigning your loan has to take on.

• Cosigner. If you default on a loan, your lender can immediately ask your cosigner to cover the payments without pursuing other means of collection.
• Guarantor. A guarantor is only liable when the lender has exhausted all other means to get you (the borrower) to pay back what you owe.

Bottom line

Getting a business loan with a cosigner can help you get access to money that you might not be able to borrow otherwise. It can also make you eligible to qualify for larger amounts at lower interest rates. Find out more about how you can sign up for a business loan with a cosigner, and compare lenders to find the right loan for you.

Frequently asked questions

• Can I get a small business loan with no credit check?

  It’s possible, but not necessarily a good idea to get a business loan with no credit check. Typically, loans that don’t require a credit check assume the worst about your credit score and come with sky-high interest rates and unfavourable terms. Getting a loan with a cosigner or backing your loan with collateral are often less expensive options.

• Can I improve my credit score with a cosigner?

  You can improve your credit score with a cosigner if your business pays back your loan on time. If you default on your loan or miss payments, your credit score will likely go down alongside your cosigner’s rating.

• How does the cosigning process work?

  You’ll need to make sure that your lender accepts cosigners before approaching a friend, family member or business partner to cosign your loan. Your cosigner will need to come with you to your lender to get verified and sign documents. From there, your cosigner will be notified if you don’t make payments in a timely manner.

• Who can be a business loan cosigner?

  You’ll usually need to find a business loan cosigner with good to excellent credit. They will also need to have a reasonable debt-to-income ratio to prove that they can assume your payments if you default.