Building Your Business Business Financing Co-Signing Process for a Business Loan By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on September 19, 2022 Fact checked by J.R. Duren Fact checked by J.R. Duren J.R. is a terms editor at The Balance, a role in which he focuses on providing clear answers to common questions about personal finance and small business. J.R. has more than 10 years of experience reporting, writing, and editing. As an editor for The Balance, he has fact-checked, edited, and assigned hundreds of articles. learn about our editorial policies In This Article View All In This Article Why a Co-Signer Is Needed for a Loan Who Can Be a Co-signer What To Know About Being a Co-Signer How the Co-Signing Process Works Getting a Co-signer and Being a Co-Signer Frequently Asked Questions (FAQs) Photo: 10'000 Hours / Getty Images A co-signer for a business loan is someone who guarantees the loan will be paid if the borrower defaults on the loan. A small business owner looking for a start-up loan should search for possible co-signers and be prepared to present co-signers if asked by the lender. A co-signer is also known as a guarantor for a loan. Key Takeaways Businesses typically need a co-signer because they don't have the credit or assets the lender is looking for. When looking for a co-signer, it's best to find a family member or friend with good credit and assets.Co-signers take on responsibility for the loan, late payments, penalties, and any collateral they're required to provide. Why a Co-Signer Is Needed for a Loan A lender usually requires a co-signer when it needs more information or more security to be assured that the loan will be paid off. Banks may require a co-signer on business start-up loans because the new business owner has no or little business credit history for the bank to gauge your ability to pay back the loan. Additionally, small businesses have a high failure rate, which increases the risk the lender takes on. Who Can Be a Co-Signer Anyone can be a co-signer, in theory. That being said, if a lender says you must have a co-signer for a loan, you may want to look first at family members or close friends. A co-signer should be someone you trust, but also someone who has some assets they are willing to pledge and someone who has a very good to excellent credit rating. What To Know About Being a Co-Signer Here are some points worth mentioning about co-signers on business loans: The co-signer doesn't just sign on the loan; they're making a promise to repay the loan if the borrower defaults. The co-signer may be required to provide collateral, in the form of property or other assets, which the bank can sell to recover its money in the event of a default. The co-signer may be required to provide a personal financial statement, and the lender will check their credit rating and consider it in the loan acceptance. The co-signer may be required to pay late charges, fines, and penalties if the original borrower fails to do so. Note While being a co-signer is a generous act in support of a business owner, the financial consequences can be dire. Co-signers should be certain they have the willingness and resource to repay the loan in the event the borrower defaults. How the Co-Signing Process Works When the lender tells the applicant they need a co-signer, several steps typically occur. The co-signer usually must have either an excellent credit rating or, in the case of a business loan, personal or business assets that can be pledged in the event of default. The co-signer must go through the application process along with the applicant, and will likely be asked to produce documents that verify your credit rating and assets. The co-signer signs all loan documents along with the applicant, asserting that he or she will honor the terms of the loan. Note The co-signer receives communications from the lender in the event that the applicant does not make payments in a timely manner. Is Being a Co-Signer Worth It? From the standpoint of the business owner who needs a co-signer, it may be the only way to get the money. However, a great co-signer could allow the business owner to get a loan that's bigger than they can afford.From the standpoint of the co-signer, it may or may not be a smart decision to co-sign. Co-signing for a loan could put the co-signer's relationship with the borrower at risk if they default and the co-signer has to pay down the loan balance, fees, and penalties. Frequently Asked Questions (FAQs) Can a business loan be co-signed? Yes, business loans can be co-signed. If a lender believes your business don't have the credit or assets the lender desires, it may as you to find a co-signer for your business loan. Who is eligible to co-sign a loan? Generally speaking, business lenders are looking for a co-signer who has excellent credit and suitable assets to back up your business loan. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. City of Houston. "City of Houston Guide to Business Financing FAQ," Page 2. Fundbox. "How To Find a Cosigner for a Small Business Loan." Federal Trade Commission. "Cosigning a Loan FAQs" MIchigan.gov. "Cosigning a Loan? Know the Risks!" The Office of Minnesota Attorney General. "Cosigning a Loan." Accion Opportunity Fund. "Cosigner vs. Collateral for a Small Business Loan."