Should You Get a Business Loan With a Co-signer?
Adding a co-signer to a business loan can help you qualify for funding and unlock better rates or terms. But it can also put your personal relationships at risk.
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A co-signer agrees to repay your business loan if you can’t.
Lenders may require a co-signer before approving you for a loan. Having one can also help unlock better rates, terms or larger loan amounts.
Only consider adding a co-signer if you can’t qualify on your own and you’re sure you can make payments yourself. If your co-signer has to step in, they probably won’t be very happy with you.
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Getting a loan can be a game-changer for your business. But poor personal credit, limited revenue or no collateral can stand in your way of approval.
Adding a co-signer to your small-business loan can help you qualify if you’re having a hard time qualifying on your own.
Don't count yourself out.
What is a co-signer for a business loan?
A co-signer is someone who agrees to take over payments on a loan if you can’t. They typically have strong credit or assets and are someone you trust. Co-signers add another layer of security for the lender, which can make your application stronger.
Many small-business lenders ask business owners to sign a personal guarantee. This means you’re responsible for paying the debt from your personal assets if the business can’t. To help strengthen your application, a lender may allow or ask for an extra guarantor or a co-signer.
Business loan co-signer vs. guarantor
The terms “co-signer” and “guarantor” are similar, but there are some key differences:
A co-signer may need to make payments when a loan becomes delinquent, meaning the borrower has missed a loan payment or paid late.
A guarantor is generally only responsible for payments after a borrower has fully defaulted on their loan. This happens when the borrower stops making payments entirely.
Additionally, a co-signer is an individual person. A guarantor can be a person, another company or small business, or even another organization like a bank or government agency, like the SBA.
When should I add a co-signer?
Consider adding a co-signer if all of the below are true:
You have a trusted relationship with someone who has strong credit or assets.
Adding a co-signer to a loan means bringing someone else’s personal credit, finances and assets into the mix, which is a big ask. Choose someone who knows you well and believes in your business.
Adding a co-signer will strengthen your application.
You should consider adding a co-signer if you can’t qualify for a business loan on your own. You can also add one if you’re trying to get better rates, terms or borrow more money than you currently qualify for.
But they’re not a magic fix for all situations. For instance, if your loan is declined based on the industry you’re in, a co-signer likely won’t help. Talk with a loan officer first to confirm it’s worth pursuing.
You’re confident you’ll be able to repay the loan.
Similar to using collateral, a co-signer can help you get approved for a loan — but they shouldn’t be part of your repayment plan.
Getting a loan you can’t afford sets you up for failure. If you don’t think your business has enough steady cash flow to make loan payments, consider waiting until your revenue is stronger.
You’ve explored all other options.
Asking someone to put their personal credit and assets on the line for your business is a big deal. Adding a co-signer can be risky, not just for a co-signer’s credit, but for your relationship with that person as well.
Before adding a co-signer, explore other options, like asking for less money, applying for an alternative business loan or offering collateral.
How to apply for a business loan with a co-signer
Applying with a co-signer isn’t much different than applying on your own. These are the general steps that you’ll need to follow:
Find a lender. Start by comparing small-business lenders to see who accepts a co-signer.
Find a willing and able co-signer. Be thoughtful about who you ask. Generally your co-signer needs to have strong personal credit and assets.
Gather documents and apply. Gather the needed information from your co-signer or refer them to the lender. Make sure they know that the lender will likely check their credit.