Should You Finance Your Small Business with a Co-Signer?


Starting your own business is exciting. Whether you’ve always dreamed of opening a bakery or feel driven to run an office supplies store, finally getting to the point where you’re ready to open a store of your own is a big and proud step in the startup process. There are still obstacles to be faced, even after a business plan is drafted up and first steps are initiated. One of the biggest issues entrepreneurs run into is financing.

There are a number of reasons entrepreneurs sometimes struggle to get the financing they need. Whether it be because they have no collateral, poor or no credit, or nothing to use as a down payment for the loan, any number of issues could get in the way of opening your business. Financing issues don’t mean you have to give up on your dream, though.

Some options for financing your business include:

  1. Short-term loans
  2. SBA loans (small business loans)
  3. Business credit cards
  4. Merchant cash advances
  5. Crowdfunding

If you’re having trouble financing your business, one other way to get the financing you need is by bringing on a co-signer. The purpose of a co-signer is to assure the bank that if, for any reason, you don’t pay your loan, your co-signer will take on the legal responsibility. Although the loan does not belong to the co-signer, they are responsible for paying it back if you can’t or don’t.

Having a co-signer can help you secure the financing you need to get your business running, but there are some things to consider before bringing one on. Here are the pros and cons you should be thinking about before asking someone to cosign on your business loan.

Pros

You can get qualified for your loan. Having a co-signer sign with you on a loan for your business will help you qualify if you couldn’t on your own. Lenders will look into the credit score, debt to income ratio, and other financial details of your cosignatory to determine whether your co-signer is someone they would lend to. Because having a co-signer means both you and the other person signing the loan promise to pay it back, as long as your co-signer is qualified, you can usually get approval for the loan you need (even if you are a less than perfect candidate).

You will build credit. If the main reason you’re having trouble getting approved for a loan is bad or no credit, having a co-signer can qualify you for the loan. Once you have the loan and start to pay down the balance, you will build credit of your own. This can help not only with your current business expenses, but it can also help if you find yourself in need of a different type of loan, like a mortgage, or someday starting another business requiring financing.

You may qualify for a lower interest rate. When a co-signer signs a loan with you, the lender takes their credit into consideration. If your co-signer has great credit, this may qualify you for a lower interest rate on your loan. The lower the interest rate, the less money you have to pay back and the lower your monthly payments will be, which may just be your saving grace during any lean months.

Cons

You could damage your co-signer’s credit. When you have a co-signer on your loan, if you stop making the payments or consistently pay the bill late, it doesn’t only affect you. Your credit will be damaged, but so will your co-signer’s, which could prevent them from co-signing on other loans or even obtaining loans of their own.

Your co-signer could be sued. When you default on a loan with a co-signer, the lender doesn’t necessarily come after you first. Lenders will often sue co-signers because they agreed to take on the responsibility and are frequently the more financially secure piece of the equation.

You could strain your relationship with your co-signer. Life happens, and things don’t always go as planned. If you default on your loan and stop making the payments, leaving your co-signer with the financial burden and responsibility to pay the loan back in full, you could strain or even ruin any relationship you had with them. If you’re considering asking a family member or close friend to sign a loan with you, it’s important to consider it very carefully and decide whether or not it’s worth potentially damaging your relationship.

Your co-signer may not be able to get a loan they need. If your co-signer has too much debt associated with them, they may not be able to get a loan for something like a car, should they need one. Although you may be making the payments, if they’ve agreed to pay for more than the lender thinks they can afford, they may deny your co-signer’s application completely.

Should You Finance with a Co-Signer?

Having a co-signer can be very helpful if you’re having trouble getting the financing you need. You should be very careful when considering a co-signer, though, because although you may not intend for things to go wrong, there could be a permanent impact on your relationship if they do. Consider this: Would you co-sign a loan with yourself?

What is your opinion on co-signing/having a cosignatory?

If you’re interested in learning more about using a co-signer to secure a business loan, contact the team at Currency today!


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