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What To Know Before Asking Someone To Cosign On Your Small Business Loan 

Business Finance
08-11-2023
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When you ask someone to cosign your business loan, you ask them to take a guarantee for any default that could happen from your end. Predominantly, a cosigner is supposed to have a splendid credit score and a significant amount of assets. 

A cosigner plays a major role in attaining the funding if you cannot do it alone. They can also help in lowering the interest rate with their reputation without bringing a collateral requirement in the deal. The lenders ask people to get a cosigner because that increases the chances of quick approval of the business loan with minimal hassle. 

Before your loan is approved, the lender will go through a thorough check of your credit history along with the cosigner’s credit history. This is one of the reasons why the cosigner is supposed to be there with you throughout the entire loan process. Even though it is a cosigning loan for them, they take most of the risk with the responsibility of repaying the loan in the event of your failure. 

1. Debt To Income Ratio 

Even after having a cosigner for your business loan, you will be held equally responsible for your loan repayment. If you have a considerable debt to income ratio already, this debt will add up. This, in turn, will spoil the chances of you or the cosigner obtaining another credit. However, if you and your cosigner have a low debt to income ratio, this loan will not add up much to your ability to gain credit. 

2. Credit Score 

When you are asking someone to cosign your loan, you have to make sure that they have a good credit score. You also have to look after this loan’s impact on you and your credit score. This is because if you fail to repay the loan, it is going to affect their credit score as well. However, if the loan is repaid on time, both your credit scores will level up. So, make sure that you choose someone trustworthy and understanding as your cosigner. 

3. Accountability 

Do your best to have clear communication with your prospective cosigner about the likelihood of any sort of events happening. The consequences of your failure to repay the loan should be properly comprehended by the cosigner so that there is no issue in the near future. 

Risks Involved In Getting A Cosigner

  • If you fail to pay an installment, the lender can start going after the cosigner to fetch your loan repayment. This could affect your relations with the cosigner. 
  • If you or your cosigner are unable to pay on time, any one of you will have to pay a late fee along with the loan repayment amount. 
  • Even after that, if your cosigner refuses to pay the loan installments, the lender will start going after your assets, and you could go bankrupt. If yours are not enough, they could also go after the cosigner’s assets. 

Making It Better For The Cosigner 

To make this loan or business loan better for the cosigner, instead of a burden, you can prepare a contract that states how much the cosigner will be responsible for in case of default. The contract can also include a clause that states that they can take you to court and make you responsible for their legal fee in case of failure of repayment. The contract should also have a clause that promises to take the name of the cosigner off the loan once you refinance the loan yourself. 

How To Ask Someone To Cosign?

  • The first step here would be explaining to your potential cosigner why you are in need of this loan. Specify the reason why you are not getting the loan solo and ask them if they are willing to help you out. 
  • Secondly, you can ask them if they want to become the primary borrower of the loan. This would imply that you will pay them, and they will make payment to the lender. 
  • Offer collateral that will be of enough value. With that, if you are unable to repay the loan installment, your cosigner can sell that off. 
  • Decide on a date until you remove the name of the cosigner from the loan. This will give them certain assurance that you are not 100% dependent on them. 

Should You Get A Cosigner? 

Before you obtain a cosigner, prepare a plan of action that would be wise enough to put to execution in case of any mishap. This plan would also build the confidence of the cosigner and help you gain their trust in turn. However, if your cosigner refuses to sign your business loan or any other loan, then maybe you should try to find another cosigner instead of forcing them and ruining your relations with them.

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