by Caron Beesley
If you’re in the process of applying for a small business loan, you may find yourself in the situation where you need to find a cosigner for the loan.
But what does a cosigner do, how do you find one, and what’s involved? Let’s look at what a business loan cosigner does and the pros and cons of having one.
What does a cosigner do?
Many financial institutions consider small businesses a high-risk investment due to their lack of credit history and high failure rate. As such they may require a cosigner on the loan. It’s a serious obligation. A cosigner doesn’t just cosign your loan, the lender can require them to repay it – and any associated late fees, fines, and penalties – if you default.
In addition to helping you secure a loan, using a cosigner may improve your chances of getting a favorable interest rates, flexible repayment terms, or access to more funds. A small business loan cosigner can also mitigate the need for you to put up collateral as security.
How to get a cosigner
A cosigner is typically someone with excellent credit history or significant assets (since they may be required to provide collateral such as property, in exchange for financing). Ideally, that individual is someone you trust, such as a family member or friend.
Cosigning services are available from organizations or professionals for a fee but should always be approached with caution and the terms of the services closely scrutinized.
Remember, you’ll need to make a compelling case to secure a cosigner. They will want to be confident that you have a well thought out business idea, business plan, and financial plan, including a budget and cash flow forecast. If you’re already an established business, be prepared to share your balance sheet and income statement as well as your P&L statement.
What is the cosign process?
Your bank will advise you whether you should find a cosigner for your small business loan. Once you’ve identified that person, they will complete the loan application process alongside you. Once approved, the cosigner must accept and sign the loan agreement.
What are the risks of having a cosigner on your loan?
A cosigner doesn’t pose any risks to you or your business. However, if you fail to keep up with loan repayments and the bank calls on your cosigner to pay, then it could seriously damage your relationship – especially if your cosigner is a family member or friend.
You should also consider how your cosigner’s credit score might impact your ability to secure a loan, the amount the bank will approve, and the lending terms.
What to do if you can’t find a cosigner
Cosigning is risky and not for everyone. If you’re concerned that your credit score may impact your chances of being approved for a small business loan, there are alternatives to entering into a cosigned loan agreement.
Improve your business credit score: It takes time, but actions such as making timely payments, paying off debt, and maintaining a low credit utilization ratio can help improve your credit score and chances of a successful loan application. For more tips, check out these 5 Ways to Increase Your Business Credit Score.
Apply for a business line of credit: A business line of credit works similarly to a credit card and can be used to make purchases for your business, such as stocking up on inventory or paying for marketing programs. Unlike other forms of financing, you don’t have to pay interest on the full sum you borrow when you secure a business line of credit. Instead, you pay interest only on the portion of the credit you use.
Innovations in technology have contributed to the emergence of new fintech firms, able to provide access to a business line of credit quickly and with relatively little administrative work. For example, with Fundbox you can apply online and get a credit decision in minutes. Unlike a traditional business loan application, you won’t have to complete any paperwork to get started. If approved, you can draw on funds anytime you need them and have them transferred to your account as soon as the next business day. Plus, if you pay back early you save and there’s no impact to your credit score just for applying.
Consider an SBA loan: The U.S. Small Business Administration (SBA) offers a variety of small business loans that are partly guaranteed by the government. This makes them a useful option for small business owners who otherwise wouldn’t qualify for financing. Learn more about SBA loans.
At the end of the day, always consider the pros and cons of having a cosigner on your small business loan. Weigh up other financing options first. If you determine you could benefit from a cosigned loan, apply for a smaller amount, and pay it off diligently. This will help improve your business credit score and boost your chances of getting a business loan the next time you need funds – without the need for collateral or a cosigner.