Starting a business requires money and credit. If you don’t have one, is it possible to have a friend or family member co-sign for a business card? And, if so, is it a good idea
Dear Your Business Credit,
Is it possible to use a person as a co-signer on a business credit card even if he has nothing with the business? – Shaya
It depends on the card issuer’s policies. Many card issuers do not allow co-signers who are not part of the business, so you will have to look at the application for the cards you are interested in to see what their requirements are.
For those who are not familiar, a co-signer is someone who agrees to pay the balance if the cardholder defaults. Usually, co-signers don’t have charging privileges.When I checked the applications of several business cards that do allow co-signers on the CreditCards.com site, some require the co-signers to be an owner or authorized officer of the business. However, there were a couple of cards in which there was a category for the authorized signatory called “other.” If you are interested in such a card, I would contact the card issuer to find out how “other” is defined.
That said, even if, for instance, family members or friends can co-sign for a business owner, I do not think it is a good idea to take on that responsibility. It is often a recipe for broken relationships later.
Co-signers take on a lot of risk when they lend their signature to someone else’s credit card application. Typically, the reason people need a co-signer is a lack of a credit history or a poor credit profile. They either have little experience managing credit or have had trouble handling it in the past. While they may build excellent credit in the future, for now, the jury is still out.
If credit card companies with deep pockets see a reason to be careful of lending to them, individuals without substantial resources need to be very mindful of the risks, too.
Business credit cards often have higher credit limits than personal cards do. If you are considering becoming a co-signer, ask yourself if you could pay the entire balance of the card if it becomes maxed out now, with the money you have in the bank at the moment. It is a real possibility that you may have to do so someday. If you can’t pay it off, it could damage your credit in the future.
Many people find it hard to say no to co-signing for a family member or friend, but saying no might be the best thing you can do for them. It will force them to find out early if they have the right stuff to run a business – or if they would be better off in a traditional job.
I interview hundreds of small-business owners and entrepreneurs every year. Most of them don’t have a rich uncle or aunt to back them. Nonetheless, they come up with many ways to self-fund, without piggybacking on someone else’s credit. Many launch a business on the side while working in a full-time job or save money for years before they start their business. In some cases, they pare down their overhead and live on a spouse’s income during the launch phase.
Once they get some proof of concept – by successfully selling whatever their product or service is – it’s usually not hard for them to build the credit profile they need to get a credit card. I can’t recall a single successful one who asked someone else to co-sign for a credit card for them.
When I see that someone isn’t able or willing to rustle up startup money on their own, I wonder if they will actually be able to handle the financial realities of running a business. What will they do if they use up their available credit and the business isn’t making money yet? Will they have the drive and ingenuity to keep the business going – and pay its bills? Or will they just walk away and leave their co-signer to fend off the creditors?
Those are important questions to ask yourself before you co-sign. It is not easy to run a small business, no matter how much fun it may seem to be on the surface. If someone is a dreamer, but really isn’t a doer, you could end up picking up the tab – and both of you may end up wishing you never co-signed.
See related: Who is responsible for business card debt?, Am I liable for cards in my name that I didn’t use?