Co-Signing Process for a Business Loan

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.

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.

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.

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)