September 24, 2023

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Access to capital can be a game-changer for your business, but poor personal credit, unconventional revenue models and a lack of collateral can stand in the way of approval. If you are struggling to obtain financing, you may find that adding a cosigner to your business loan is helpful.

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With Fundera by NerdWallet

What is a co-signer for a business loan?

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Many small-business lenders require a business owner to sign a personal guarantee, which means the owner is responsible for paying back the loan from his or her personal assets if the business cannot. To help secure your loan, a lender may allow or request an additional guarantor or a co-signer.

Like a cosigner on a personal loan, a business loan cosigner is a trusted person who agrees to take over payments if the business or the first guarantor cannot do so. A co-signer is essentially another person supporting the repayment of your loan, which can make your application more favorable to a lender.

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Business Loan Cosigner Vs Guarantor

The terms guarantor and cosigner are sometimes used interchangeably, but there may be differences in liability specific to lenders or state laws. A co-signer may be asked to make payments when the loan is past due, meaning the borrower has missed payments or is late. A guarantor, on the other hand, is generally only responsible for payment when a borrower has completely defaulted on his loan. Business loan default occurs when the borrower has completely stopped making payments.

Additionally, a co-signer is an individual, while a guarantor can be an individual, another company or small business, or even another organization such as a bank or government agency such as the SBA.

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When should I add a cosigner?

Before adding a cosigner, ask yourself the following:

Do I have someone I trust and who confides in me?

Adding a co-signer to a loan means bringing someone else’s personal debt, finances, and assets into the mix, which may be too much to ask. They should be people who know you and your business well.

Can I be sure that adding a cosigner will strengthen my loan application?

A cosigner can help in specific situations, but they are no magic solution to all of a borrower’s issues. For example, if your loan gets rejected based on the type of industry, a cosigner probably isn’t going to help. If you haven’t discussed this with a loan officer or other financial professional first, you may not be fully involved in finding a co-signer.

Am I confident that I will be able to repay the loan?

Similar to using collateral, a cosigner can be a tool to help you get approved for a loan – but they shouldn’t be included as part of your repayment plan. Taking out a loan you can’t afford sets you up for failure. If you don’t think your business has enough revenue or cash flow to make loan payments, you may be better off waiting until you have more stable revenue, pay off a slightly higher business loan, or your Get better personal loans.

Have I considered all my other options?

Asking someone to put personal credit and assets on the line for your business is a big deal. Adding a cosigner can be risky, not only to a co-signer’s credit, but also to your relationship with that person. For this reason, it’s usually best to use a cosigner as a last resort. It may also be worth agreeing to a higher interest rate or lower loan amount before using a cosigner.

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How to Apply for Business Loan with Cosigner

Applying with a cosigner isn’t much different than applying on your own. These are the general steps you need to follow:

Find a Lender. You can compare small-business lenders to see which will accept a cosigner.

Find a willing and able cosigner. Think about who you ask. Generally your co-signer must have strong personal credit and assets.

Collect documents and apply. Get information directly from your cosigner or forward them to the lender. Make sure they know that the lender will likely pull their credit.

Adding a cosigner to your business loan application can help you get access to capital you might not otherwise qualify for, but it shouldn’t be taken lightly, and it doesn’t help every situation. Business owners should consider their financial situation as well as their other options to decide whether a cosigner is right for them.

Find the Right Business Loan

The best business loans are usually the ones with the lowest rates and the most ideal terms. But other factors — such as the timing of the funds and the eligibility of your business — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.

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