A business loan cosigner is an individual who promises to make payments on the loan if the other borrower(s) are unable to do so. Getting a cosigner can improve your odds of landing a loan approval. However, you should be aware of the risks involved with doing this.
For instance, missing a payment on a loan could negatively impact a cosigner’s credit score. This, in turn, could affect their finances as it may cause them to get higher rates. It could also damage any business or personal relationship you have with them.
If getting a business loan with a cosigner isn’t an option, consider working with a company like Lendio. Lendio is a loan broker that has a network of over 75 different lenders, something that can improve your chances of getting matched with a lender willing to issue financing.
How You Can Benefit from a Business Loan With a Cosigner
If you’re thinking about when to use a business loan cosigner, be aware that the individual’s credit and income can be taken into consideration when getting qualified for financing. Well-qualified cosigners can strengthen the loan, something that can not only boost your approval odds but may also help you get more favorable rates and fees.
Improve Your Chances of Getting Approved
In determining whether you qualify for financing, lenders typically evaluate your income as a critical component of your ability to repay a loan. Lenders commonly consider total business revenue and other financial ratios such as debt-to-income (DTI) ratio and debt service coverage ratio (DSCR).
If your cosigner has excellent income and low debt levels, this can positively impact the financial ratios used to determine whether a loan approval can be issued.
Boost Your Odds of Getting Better Rates & Terms
Even if you can qualify for a loan on your own, adding a cosigner could qualify you for lower interest rates. For example, loans that demonstrate more favorable financial ratios and income figures represent a lower level of risk for a lender, which may qualify you for better rates and terms.
Eliminate the Need for Collateral
Loan applicants with borderline credit or finances may sometimes be asked to provide collateral as a condition for getting a loan. This action reduces the lender’s risk by allowing the lender to take possession of the collateral to recoup its financial losses in the event of a default.
However, adding a cosigner to strengthen a loan application can lower the overall assessed risk so as not to require collateral to secure financing.
How Using a Business Loan Cosigner Works
Getting a loan with a cosigner is similar to applying for a loan on your own. Your cosigner should be just as involved with the process as you are, as they’ll also need to sign paperwork and provide supporting documentation to verify various aspects of their credit and finances.
Step 1: Submit The Loan Application
Most lenders allow you to add a cosigner as part of the initial loan application process. Typically, the cosigner will need to provide the same information as all other borrowers on the loan. This can include their name, social security number, other personally identifying information, place of employment, sources of income, a list of assets and debt, and more.
Step 2: Provide Supporting Documentation
Once the loan application has been submitted, cosigners and other individuals on the loan will typically be asked by the lender to provide certain supporting documents. This paperwork must be provided so that the lender can evaluate your eligibility for the loan.
Cosigners should expect to provide income documents such as tax returns, balance sheets, and other financial statements. Bank statements and other information on other business assets may also be required.
You can view our list of other common small business loan requirements for more information.
Step 3: Review Lender’s Decision & Applicable Loan Terms
Once the lender has reviewed all the required documents, it can determine whether an approval can be issued and at what rates and terms. If you’re approved, you and your cosigner may need to sign preliminary disclosures agreeing to the terms and conditions of the loan.
If you don’t qualify for a loan, this is the step at which you can consider adding a cosigner if you haven’t done so already. If you decide to add a cosigner here, you’ll need to inform the lender and then repeat the process starting from step one.
Step 4: Sign Final Loan Paperwork
Once you and your cosigner have accepted the terms of the loan, you may both be required to sign final disclosures. This will be the paperwork that takes precedence over anything else you’ve been presented with. At a minimum, we recommend reviewing the accuracy of the following items:
- Loan amount
- Repayment term
- Payment amounts
- Interest rate (including whether it is fixed or variable)
- Fee schedule (such as prepayment penalties or late fees)
Step 5: Make Timely Payments
While this may seem like an obvious step to take, we recommend cosigners regularly keep tabs on whether payments have been made. If payments are missed, a lender could report late payments to the credit bureaus, which would negatively affect the credit scores of all borrowers who signed for the loan.
Who Can Qualify as a Cosigner for a Business Loan
Cosigners commonly include business partners and family members, but you can usually ask anyone to be a cosigner for your loan. You should be aware, however, that some lenders and loan programs may have restrictions on who can be considered an eligible cosigner.
For example, some mortgage loans may only allow a cosigner if that individual is also occupying the property. Similarly, if a cosigner’s assets are being used to qualify, some programs may only allow it if the cosigner is a family member.
If you’re unsure if your cosigner will be allowed, we recommend asking your lender before you get too far into the loan approval process.
Pros & Cons of Getting a Business Loan Cosigner
While there are a handful of benefits to getting a cosigner, you should also consider some of the risks in asking someone to be financially responsible for the loan in the event you are unable to make timely payments.
| PROS | CONS |
|---|---|
| Improves your chances of getting approved for a loan | May damage relationship with your cosigner if you fall behind on payments |
| Can help you qualify for better rates and loan terms | Risk of getting approved for more than you can comfortably afford |
| May eliminate the need to provide collateral | Late payments will damage the credit score of all individuals on the loan |
Pros & Cons of Being a Cosigner
As you’ll see in the table below, being a cosigner on a loan carries many risks while offering limited benefits. As a result, you should carefully consider agreeing to be a cosigner on any type of loan.
| PROS | CONS |
|---|---|
| Can help build positive credit if loan is paid on time | Legally obligates you to make payments if the primary borrower is unable or unwilling |
| Can damage your credit score if payments are delinquent | |
| Less visibility into the status of the loan, such as whether payments have been made | |
| Cosigned loans may limit your ability to qualify for other loans | |
| May damage relationship with borrower if payments are not made on time | |
Alternatives to Getting a Business Loan Cosigner
If you’re not able to find a business loan cosigner to help you get approved for a loan, there are some alternatives you can consider below. We also recommend checking out our guide on how to get a small business loan, as it contains information about how you can improve your approval odds, as well as your chances of getting a more favorable interest rate.
- Easy business loans: Our list of the best easy business loans contains lenders that have flexible eligibility criteria and low documentation requirements. Many can also offer funding speeds as fast as 24 hours.
- Bad credit business loans: The lenders we selected as the best bad credit business loans can offer higher approval rates for those with low credit scores. Just be aware that with a lower credit score, you’re unlikely to qualify for the best-advertised rates.
- Personal loan for business purposes: These loans look at your personal credit rather than that of your business, which can improve your odds of landing an approval. See our selection of the best personal loans you can get.
- Rollover for business startups (ROBS): If you’re unable to get financing of any kind, a ROBS could be the right fit for you. This is not a loan, but rather a way to access your retirement accounts tax- and penalty-free. A ROBS is a complex process, so we recommend working with a company in our best ROBS providers roundup.
Frequently Asked Questions (FAQs)
A major difference is that cosigners don’t typically have ownership of the asset being financed, whereas co-borrowers do. Additionally, cosigners aren’t normally expected to make payments unless the primary borrower defaults. Co-borrowers, by comparison, are often looked to as having the primary responsibility of making timely payments.
Yes. While having bad credit may negatively impact the interest rate you get, the additional income from the cosigner can still help improve your approval odds.
Falling behind on payments can damage your co-signer’s credit score as well as the relationship you have with them. Because of this, it’s a good idea to notify them immediately if you may not be able to make a payment.
Bottom Line
A business loan cosigner can make it easier to get approved for financing. In some cases, it may even help you get better rates and terms. However, you should consider the risks involved with adding a cosigner to your loan as it could strain the relationship if you end up being delinquent on the loan payments.
