Do You Need a Cosigner for Your Business Loan?

When you apply for a business loan, you might get approved but this doesn’t always happen for everyone. You might apply for a loan and get denied or offered a high rate and unfavorable terms. However, a cosigner can sign a loan and help you avoid this situation.

In this post, we will go over what a business loan cosigner is and the pros and cons of having one.

What is a Loan Cosigner?

A business loan cosigner adds their name to a primary borrower’s loan application. They agree to pay back the loan plus any additional fees in the event the borrower is not able to repay their debt.

If you cannot qualify for a loan on your own or would like to increase your chances of securing a loan with a competitive interest rate and terms, a cosigner might help you out.

The cosigner you choose should be someone you trust and who has a great credit score. A cosigned loan differs from a joint loan because the co-signer will not be able to access the funds even though they may be responsible for repaying them.

Benefits From Having a Small Business Loan Cosigner

There are some situations in which a loan cosigner makes sense. You might want to consider one if any of the following applies to you.

  • You have bad credit history: if you have poor credit, a track record of liens or bankruptcy, a cosigner would be a good option for you.
  • You want a large loan amount: if you want to borrow more than you get approved for it can be helpful to have a cosigner. They should be able to show that they have the money to repay the loan.
  • You don’t want to put up collateral: many lenders require collateral to guarantee a business loan.

The Pros of a Business Loan Cosigner

  • Increased odds of approval: if you don’t have the best credit, a cosigner can increase your chances of approval.
  • Low interest rate: a cosigner can help you lock in and lower interest rate than if you were to qualify for financing without one.
  • Better terms: you might be forced to repay your loan quickly if your credit score is poor. A cosigner with good credit can get you better terms.

The Cons of a Business Loan Cosigner

  • Collateral might be required: your cosigner might have to provide collateral. The lender can sell it if you don’t pay back the loan.
  • Potential damage to the relationship: if your cosigner is your friend or a family member, your relationship may take a hit if you fail to repay the loan.
  • Higher risk of debt: since a cosigner can make it easier for you to get approved for a loan with a higher amount, you may steer your business into a cycle of debt. This is particularly true if you don’t make your business loan payments on time and in full.

Alternatives to a Small Business Loan Cosigner

If you think that a cosigner is not for you, consider alternative options.

  • Fix your credit: boost your credit score by making timely payments, paying off debt, and not opening any new credit accounts. This is only a good idea if you can wait to receive financing since this will take some time.
  • Apply for business loans that accept poor credit: if you need money fast, find lenders who offer business loans for those with poor credit. However, you might be stuck with high interest rates and fees if you do this method.

The Bottom Line

A cosigner may seem like the ideal way to get approved for a loan with a low rate and great terms. However, before you move forward with one, consider the pros and cons. Also, we suggest exploring alternative financing options.