What To Know Before Asking Someone To Cosign On Your Small Business Loan
Learn what co-signing for a loan means, including its pros and cons. Know about the things you should do before asking someone to co-sign on your small business loan.
Taking a business loan may require a cosigner if your credit score or income is low or if you're just launching your business. It is a lender's way of reducing their risk. However, before looking for a co-signer, consider the advantages and disadvantages of one. This article covers all you need to know about cosigned business loans.
What Is A Co-Signed Business Loan?Co-signed business loans are a form of business financing guaranteed by a co-signer. If you default on the loan, your co-signer or guarantor will pay on your behalf. It is typical for co-signers to have good or excellent credit, as well as substantial assets. Cosigning for a loan is tedious and involves a lot of paperwork.
How The Co-signing Process Works?Here's how you get a business loan with a cosigner:
• Depending on the applicant’s income, credit, or debt-to-income ratio, the bank may request a business loan cosigner. A cosigner usually increases your chances of getting approved.
• In most cases, you'll need a co-signer with pristine credit or assets to pledge in case of default.
• Applicants and their co-signers must both pass the application process. It is essential to submit documentation demonstrating your credit rating and asset value to the lender.
• At the end of the process, a co-signer must sign all loan documents to confirm that they agree to the loan terms.
• Co-signers receive bank communications and are informed if the applicant fails to make payments on time.
Pros And Cons Of Using A Cosigner
ProsThe benefits of having a cosigner for a business loan include:
• Co-signers make it easier for applicants with no credit history or bad credit to get a loan. A co-signer who accepts responsibility for repayment lowers the lender's risk, making it easier for the lender to approve the loan.
• As a cosigner lowers the risk, the primary borrower usually gets a lower interest rate.
• The borrower may qualify for a bigger loan amount with a cosigner.
• Both the signer and co-signer will have the loan recorded on their credit reports. On-time monthly payments by the signer will increase both parties' credit scores.
ConsCo-signing a loan entails the following risks:
• Late or missed payments will also affect the signer’s and cosigner's credit score because the loan debt appears on their credit reports.
• By co-signing a business loan, the co-signer agrees to accept the same responsibilities and penalties as a lender. A late or non-payment of the loan could result in late fees, legal action, and forfeiting collateral.
• If the primary signer does not repay the loan, this could affect the cosigner's relationship with the borrower.
• Co-borrowers aren't always the same as co-signers. But, in some cases, they will co-own your purchases with the loan.
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Frequently Asked Questions
Q1. Can a business loan be co-signed?
Ans. Yes, you may need to find a co-signer for your business loan if your lender believes you don't have the required credit score or assets.
Q2. Who is eligible to co-sign a loan?
Ans. Business lenders typically require co-signers to have an excellent credit score and adequate assets to support your business loan.