Getting a business loan can be a complex process and you may have difficulty getting approval from a traditional lender. However, in many circumstances, a co-signer can help you obtain approval much more efficiently. There are stipulations on who can co-sign with you on a business loan, as most lenders require that the individual be a blood relative, a successful and established business owner, or a partner in the business you want to start. In cases where you do have an approved co-signer, there are many ways this route can benefit your business loan request.
Weighted average method
This method indicates an evaluation process in which the lender takes the credit score for the loan applicant and that of his or her cosigner into account. The score for each will be weighed based on the percentage of ownership he or she will have in the company. In this way, the co-signer may not have a significant influence in the approval process.
Non-weighted average method
This method lends more value to the existence of the co-signer, since ownership percentages aren’t considered. It allows the co-signer to have a moderate influence on whether or not the business loan is to be approved.
“Best credit” method
In this case, your credit score may not even enter into the equation, which is one reason few lenders employ this method. It consists of looking at the co-signer with the best credit rating and basing a decision solely on that individual’s profile. For that reason, a co-signer with a very good credit score can significantly impact the decision to approve your loan application.
In most cases, the non-weighted average is the method used by traditional lenders, which means your co-signer’s credit rating will be influential. Talk to your lender to find out specifically what methods they use and what other stipulations may affect the approval process.
The co-signer you use should be chosen carefully for the reasons previously mentioned. Additionally, they should be made fully aware of the financial stake they will have in your business. A default on the loan can harm the co-signer’s credit as well as your own. Additionally, the lender may seize their assets and your own to help cover the debt, so they should be fully apprised of those possibilities. While a co-signer can help you get your business loan, it creates a business relationship that forces you to share the risks of the business together.