What is a Co-signer for a Business Loan? What Does a Co-signer Do?

The Co-signing Process for Business Loans

Co-signing a Business Loan
Co-signer for a Business Loan. Peter Dazeley/Getty Images

Maybe you went to a bank for a business loan and the bank said you need a co-signer, or maybe you've been asked to co-sign a business loan. This article discusses the co-signer and how co-signing a business loan works. 

What is a Co-signer? What Must a Co-signer Do? 

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. It might be said that the Small Business Administration loan guarantees serve the purpose of "co-signer" on small business loans.

Why is a Co-signer 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 business credit history for the bank to rely on to pay back the loan.

Who Should I Ask to be a Co-signer? 

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 Should I 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; he or she is making a promise to repay the loan if the borrower defaults.
  • The co-signer usually is 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 is required to provide a personal financial statement, and the co-signer's credit rating is checked and considered in the loan acceptance.
  • The co-signer is required to pay late charges, fines, and penalties if the original borrower fails to do so.

How the Co-signing Process Works

How co-signing works for a business or personal loan:

  • The applicant may be told by a bank or other lender that a co-signer is needed.
  • 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, must produce documents that verify credit rating or value of assets.
  • Finally, the co-signer signs all loan documents, asserting that he or she will honor the terms of the loan.
  • The co-signer receives communications from the bank and is notified in the event that the applicant does not make payments in a timely manner.

Should You Get a Co-signer? Should You Be a Co-signer? 

This is a difficult question. From the standpoint of the business owner who needs a co-signer, it may be the only way to get the money.

From the standpoint of the co-signer, it may or may not be a smart decision to co-sign.  

If you and someone else enter into a co-signer relationship, make sure to get everything in writing. 

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