A borrower with weaker credit asked a question about getting a business line of credit where the bank required someone be added to the loan as a “co-signer”. The questioner stated that the bank is requiring the co-signer to be added to the borrowing entity…something that the questioner wasn’t sure if he wanted to do. Here was our response…
Bankers sometimes tell you things that don’t seem to make sense. I was a banker for 25 years, much of that time consisted of my working on commercial loans, and I can tell you that there usually is a reason that bankers do what they do. Another thing that I can tell you is that underwriting guidelines will sometimes vary from institution to institution.
In this instance, you’re trying to remedy weaker credit by adding another person to the business loan. Technically, the entity will be the borrower and both you and the other person will be “guarantors” as opposed to the other person being a co-signer. The borrower will be primarily responsible for the loan payments, but if the borrower doesn’t pay, the bank will come after the guarantors to pay the loan.
Whether or not the other party will need to be added to the loan is not universal. It will depend upon the lender and what they require. The best thing to do is to ask the lender what they require. If you have already entered into a contract to purchase the property that will be collateral for the loan, the lender will likely require that the borrower be the same entity that is listed on the contract. If you choose to simply create a separate entity to own the property with the other guarantor as another owner, you will likely need to reach out to the seller, explain that you wish to purchase the property in a new entity (something that is pretty normal), and have an addendum prepared to switch out the purchasers.
The person to ask about your particular question, however, is your lender. Simply ask them how they would prefer to see the transaction structured and that should guide you toward your next steps. Good Luck!