Business loans are crucial for MSMEs (Micro, Small, and Medium Enterprises), offering the necessary capital for machinery, expansion, and more. However, MSMEs are often seen as higher-risk borrowers, making it more challenging to secure loans. This is where co-signers and co-applicants come into play.
In the world of MSMEs, securing financial support can determine the success of a venture. Two key terms you’ll often come across during the application process are ‘co-signer’ and ‘co-applicant.’ These roles can have a significant impact on your loan approval chances and the terms you receive.
Role of Additional Parties in Loan Applications
In business loan applications, additional parties like co-signers and co-applicants play an essential role in reducing risk for lenders. Lenders assess the likelihood of repayment, and having a co-signer or co-applicant provides an added layer of security. These individuals act as financial backers who agree to step in if the borrower is unable to repay the loan.
A co-signer or co-applicant is not just someone who signs the agreement; they should bring solid financial credentials to the table, including a strong credit score, stable income, and a clear understanding of their responsibilities. Their presence assures lenders that the loan is less risky, especially if the business is new, has limited credit history, or is requesting a larger loan amount.
In essence, these additional parties are viewed as partners in the business’s success. Their financial stability enhances the loan application, increasing the chances of approval and better loan terms.
Grow your MSME with collateral-free business loans
What is a Co-Signer?
Think of a co-signer as your financial backup – someone who steps in to strengthen your loan application by putting their own creditworthiness on the line. They’re essentially telling the lender, “I believe in this business so much that I’m willing to be responsible for the loan if things don’t go as planned.”
For many small business owners, especially those working to build their credit, having a co-signer can be a game-changer. The co-signer’s strong credit history and stable income act as a safety blanket for lenders, often leading to better loan terms – you might secure a lower interest rate or qualify for a larger amount than you could on your own.
However, it’s crucial to remember that this isn’t just a simple signature on paper. For the co-signer, this commitment means they’re legally obligated to take over loan payments if the business can’t keep up. It’s a serious responsibility that requires careful consideration from both parties – think of it as a financial partnership that could potentially last the entire term of the loan.
What is a Co-Applicant?
A co-applicant is someone who applies for a loan right alongside the primary borrower. Think of it like a joint venture – you’re both stepping into the loan process together, sharing equal rights and responsibilities from the very start. Unlike a co-signer who stays in the background, a co-applicant is right there with you from day one, sharing both the benefits and responsibilities of the loan. When you apply together, the lender looks at both of your financial profiles – combining your incomes, credit histories, and overall financial strength.
This team approach can be particularly powerful for MSME owners. Maybe you’re bringing the business expertise while your co-applicant brings a strong credit history, or perhaps you’re combining your incomes to qualify for a larger loan amount. Whatever the case, you’re true partners in this financial commitment.
Just remember – as partners, you’re both equally responsible for every payment. Your financial behaviors will affect each other’s credit scores, and success (or struggles) with the loan will impact you both. It’s like being financial roommates – you both have keys to the house, and you both need to chip in to keep the lights on.
Key Differences Between a Co-Signer and a Co-Applicant
Lending Terms:
Including a co-applicant in your business loan application can improve your eligibility for a larger loan amount. Since there are multiple borrowers, lenders review the income and credit history of each co-applicant to approve the loan. This is especially helpful for MSMEs seeking higher funds to expand or invest in equipment.
A co-signer, however, is typically needed when the primary borrower doesn’t meet the eligibility criteria due to a low credit score. A co-signer with a strong credit score can help secure the loan and potentially reduce the interest rate.
Repayment:
Both the primary borrower and co-applicant share the responsibility for repaying the loan. However, a co-signer is not responsible for monthly repayments unless the primary borrower defaults on the loan.
Tax Benefits:
If the co-applicant is also a co-owner of the business, they may be eligible for tax benefits on the joint loan. However, if the co-applicant has no ownership stake, they won’t receive these benefits. On the other hand, a co-signer is not eligible for any tax benefits, as they are not part of the ownership.
Ownership:
The name of the co-applicant will be listed on all loan documents, and both the primary borrower and co-applicant will share ownership of the assets once the loan is fully repaid. Co-signers, however, do not have ownership rights related to the loan or the property.
Benefits of Having a Co-Signer/Co-Applicant
Better Loan Approval Odds
A co-signer/co-applicant with strong credit and stable income can dramatically improve your chances of loan approval. This is particularly helpful for new business owners or those with limited credit history. The co-signer/co-applicant’s financial strength acts as a safety net for lenders, making them more confident in approving your loan.
Access to Lower Interest Rates
When a creditworthy co-signer/co-applicant backs your loan, lenders often offer more competitive interest rates. Their strong financial profile helps reduce the lender’s perceived risk, which typically translates into better loan terms and lower monthly payments for your business.
Complete Control Over Assets
Unlike with a co-applicant, having a co-signer doesn’t mean sharing control of your business or loan funds. You maintain full ownership and decision-making power over how the money is used. The co-signer’s role is purely to provide financial backing without any claim to the assets or funds.
Credit Building Opportunity
Making regular, on-time payments not only builds your business credit but also maintains your co-signer/co-applicant’s good credit standing. This creates a positive credit history that can help you qualify for future loans independently, potentially eliminating the need for a co-signer/co-applicant on future business loans.
Shared Responsibility for Repayment:
Unlike a co-signer, both the primary borrower and the co-applicant share the responsibility for repaying the loan. This shared responsibility can help ease the burden of repayment, making it more manageable for the business owner, as both parties are accountable for meeting the loan terms.
How to Decide Between a Co-Signer and a Co-Applicant
Selecting the right co-signer or co-applicant is a crucial step for MSMEs when applying for a business loan. A co-signer with a strong credit score and stable income can improve the chances of loan approval, especially if the primary borrower has a limited credit history. Meanwhile, a co-applicant with a solid financial background not only strengthens the loan application but also shares the repayment responsibility.
When making this decision, MSME owners should consider factors such as the financial stability of the individual, their relationship with the borrower, and their willingness to take on the obligation, ensuring a smooth borrowing experience.
Conclusion
In summary, both co-applicants and co-signers play a vital role in the MSME Loan application process. A co-applicant can improve loan eligibility, potentially secure better interest rates, and share equal responsibility for repayment. On the other hand, a co-signer provides an added layer of security for lenders, helping borrowers with lower credit scores qualify for a loan, but they do not share ownership or repayment responsibilities unless the primary borrower defaults. The choice between a co-applicant and a co-signer depends on the borrower’s financial situation and business needs.
At Kinara Capital, we understand the challenges MSMEs face when securing funding. That’s why we offer collateral-free business loans with a simple and hassle-free application process. Whether you apply individually or with a co-applicant, our goal is to provide quick access to timely loans, helping small businesses grow without unnecessary financial roadblocks. With flexible loan options and doorstep service, Kinara Capital makes business financing more accessible for MSMEs across India.
FAQs
1. What is the main difference between a co-signer and a co-applicant?
A co-applicant shares equal responsibility for loan repayment and may co-own the assets, while a co-signer only guarantees the loan without ownership or repayment obligations unless the primary borrower defaults, offering added security to lenders.
2. Can a co-signer also be a co-applicant?
No, a co-signer and a co-applicant serve different roles. A co-applicant shares loan responsibility and ownership, while a co-signer only guarantees repayment if the borrower defaults. One person cannot be both in the same loan.
3. Is having a co-signer or co-applicant mandatory for business loans?
No, having a co-signer or co-applicant is not mandatory for business loans. However, they can improve loan approval chances, especially for borrowers with low credit scores or limited financial history, by providing additional security to lenders.
4. Who is responsible for repayment in the case of a co-signer?
In the case of a co-signer, the primary borrower is responsible for loan repayment. However, if the borrower defaults, the co-signer must repay the loan, as they have legally guaranteed the debt to the lender.
5. What documents are required for a co-signer or co-applicant?
The required documents for a co-signer or co-applicant typically include:
- Identity Proof (Aadhaar Card, PAN Card, Passport)
- Address Proof (Utility Bill, Voter ID, Rental Agreement)
- Income Proof (Salary Slips, Bank Statements, ITR)
- Credit Report (For assessing financial stability)
Lenders may request additional documents based on the loan type and applicant’s profile.
