If you have a poor personal credit score or a lacking credit history, applying with a cosigner for a business loan can make a lot of sense. A cosigner can increase your chances of qualifying for a lower interest rate and help you meet your lender’s collateral requirements.
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 backup 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.
A cosigner on a business loan may be a good idea when:
However, a cosigner may not help if your business can’t meet revenue or time-in-business requirements.
Getting a business loan with a cosigner can be straightforward. Here are the basic steps:
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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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:
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.
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.
Getting a loan with a guarantor isn’t always a better alternative than 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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