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.
