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NGExpert financial copywriter
Page written by Chris Godfrey. Last reviewed on October 24, 2024. Next review due March 1, 2025.
Getting a small business loan with poor credit, lack of collateral, or for a risky type of business can be very tough. However, in the right circumstances, adding a cosigner to the deal may increase your chances of approval.
In many cases, when you apply for a business loan, the lender will ask you to provide a personal guarantee. This means you are personally responsible for repaying the loan if your business defaults. Your home, your savings and your other valuable assets may be seized and sold by the lender in the event of total loan default. However, if your credit score is poor, or you lack sufficient collateral to support the loan, your personal guarantee may not be enough. In which case, you could consider adding a cosigner to the transaction.
The cosigner will be a person you trust and who has good credit and assets they are willing to offer as collateral. They agree to make the payments on your business loan if you or your business cannot. Essentially, the cosigner is a fail-safe for the lender. If you don’t pay, they will. This can give added comfort to the lender, and in the right circumstances, may improve your chances of loan approval.
A cosigner can be anyone you know – friends, family, business associates etc. They will need good credit and sufficient assets to cover the value of your business loan. You should choose your cosigner well. The cosigner should be someone you trust and who trusts you, because asking them to put their finances, assets and credit on the line is no small thing. Keep in mind that if things do not go according to plan and they end up paying back your loan it could have a detrimental impact on your relationship with them.
Before you ask anyone you trust to be a cosigner, you should consider these important points:
A cosigner can strengthen your application in certain situations. Typically, lenders like to secure as much collateral as they can, so adding extra assets and revenues to the deal may tip the balance in your favour. However, a cosigner may not help if your application has been declined because of the type of business you operate, if you’re a startup in a risky industry, or for other reasons that have nothing to do with your personal credit or lack of collateral.
The cosigner is a backstop for the loan, not a repayment partner. You should base your financial calculations – can you afford the repayments – on a scenario where the cosigner is only added to the deal as insurance for the lender. If you don’t think you can make the loan payments without drawing on the cosigner’s funds, you may be better off waiting until you have higher revenues, better credit or sufficient assets to carry the business loan on your own.
Adding a cosigner to your business loan can be risky, not just for their credit and assets but for your relationship with that person. Therefore, you should only bring in a cosigner as a last resort. Additionally, have you investigated business loans that may not need a personal guarantee and that use the assets you finance as collateral for a loan? Invoice financing, merchant cash advances, equipment loans and revenue financing may give you the funds you need without any need for a cosigner.
A cosigner may be needed for a business loan when your personal credit is weak, you lack sufficient collateral to support the loan, your business revenues are erratic, or your business is very risky. To protect themselves from loss, the lender may ask for a cosigner to guarantee the loan will be paid back. The cosigner puts their credit, finances and assets on the line and acts as insurance for the lender.
Getting a small business loan with cosigner is similar to getting a loan on your own:
Start by searching for a lender who can provide business loans with a cosigner. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of cosigner loan deals from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for business owners who have never taken out a business loan with cosigner before.
Your cosigner will need strong credit and sufficient assets to perform as collateral for the loan.
You can either gather essential documents from the cosigner – bank statements, tax returns, details of assets, etc. – or you can simply refer them to the lender. Always let the cosigner know that the lender will conduct a hard search on their credit report.
When a cosigner is added to a loan transaction, they go through the application process alongside you. This means the lender will check the cosigner’s credit and ask for documents to verify they have sufficient assets to support the loan. If the loan is approved, the cosigner will cosign the loan agreement, promising to honour the terms and conditions of the loan if you default.
As a cosigner to a business loan, you are acting as a backstop for the loan applicant. How does this affect you?
No matter if you’re seeking your first cosigner business loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for your funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality business loans with cosigner from a choice of lenders. Give your organisation a financial boost even if your credit is less than stellar. Register with Swoop today.
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.
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