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What to Know Before Asking Someone to Cosign on Your Small Business Loan

Learn about the risks a cosigner takes when helping you find funding.

Preparation August 23, 2017

Cosigning on a small business loan.

 

A burpee is basically a jumping jack combined with a push-up – they’re not fun, and I try to avoid them whenever possible. Some days that’s easier than others.

I recently ran an obstacle race where the penalty for not completing a trial was 30 burpees.

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One obstacle was beyond me: pulling a sandbag about twenty feet into the air using a rope and pulley. I knew I was in trouble the moment I tugged on the rope and the bag didn’t budge. No matter which way I wrenched my body, the bad wouldn’t rise more than an inch.

Defeated, I stepped toward the burpee zone. Before I could get there, though, a man stopped me and asked, “Did you get the bag up?”

“No,” I replied. “Not this time.”

“Let’s do it together,” he said.

Help wasn’t against the rules. Together, we made short work of the task, and I got to avoid the burpees.

Teamwork can make an impossible task possible. It’s even true for loans. When you can’t qualify for a small business loan on your own, a cosigner can change everything.

What is a Cosigner

A cosigner is a friend or family member who agrees to pay your loan if you cannot. Besides helping you get approved for funding that you may not have otherwise qualified for, the benefits of using a cosigner may include getting a lower interest rate, being offered a larger sum of money, and avoiding the need to offer up collateral.

What Are the Risks for the Cosigner

Before you ask someone to co-sign on your loan, you should know about some of the risks they agree to take on:

  • Your cosigner is equally responsible for paying off the debt and will be in just as much trouble if the debt doesn’t get paid. That means having to pay late fees if there are any, and even having wages garnished.
  • If you miss a payment, the loan provider or its debt collection agency can immediately start going after the cosigner. This is more common than you might think.
  • The cosigner’s credit will take a hit during the life of the loan. If she tries to borrow money, the amount of debt on your loan will count against her, making approval more difficult. If you default on the loan, the cosigner’s credit will again suffer.
  • While a cosigner and a co-borrower aren’t always the same thing, in some cases a co-borrower will co-own whatever you use the money to purchase.
  • If the loan falls apart, your friendship probably will, too. Even if the loan goes off without a hitch, the stress added to the cosigner’s life may have damaged your relationship.

Rewards often counterweight great risks. This is not the case for a cosigner who enjoys no benefits other than helping you obtain funding and establish credit.

How You Can Make It Better for the Cosigner

When looking at the risks involved in cosigning a loan, it becomes a wonder that anyone agrees to do it. If you’re having trouble getting someone to sign the dotted line, there are ways to make the offer more appealing.

First, you should use a contract that shows what the cosigner will be responsible for and what will happen if the cosigner takes over the loan. The arrangement will seem more reasonable if the cosigner gets your business in recompense for paying off the loan if that should happen.

The contract could state that if your cosigner takes you to court over the loan, you agree to be responsible for her legal fees.

You can also put in writing that you plan to take the cosigner off the loan later when you refinance the loan.

These assurances will go a long way to making your friend or family member feel more comfortable about the loan.

What if You Can’t Find a Cosigner?

Cosigning a loan is a risky venture. It has ruined more than a few friendships, and it shouldn’t be a surprise that many people have no interest getting involved with it. If you can’t find a cosigner, you might have better luck suggesting that your friend or family member just lend you the money themselves.

If you can’t get the entire amount, try for enough to make a down payment on what you plan to purchase.

Final Thoughts

Now that you know some of the risks involved with co-signing, it’s no wonder why it can be difficult to find a cosigner. Ideally, you wouldn’t need one. If you have a strong enough credit history on your own, then you might not. If you’re ready to check and see what kind of small business funding we can find you, go ahead and fill out our brief form today.

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