Guarantor versus Co-signer

Business owners have a lot to worry about. Insurance, payroll, supplies, schedules, whether someone bought coffee, the list never stops. Acquiring vehicles for themselves and employees to get the work done is just one item on the list.

Moving right past the basic question of what vehicle will be best suited for the work at hand, is how to acquire the vehicle.

Also, assuming you have talked to your accountant about whether leasing or purchasing is the best option for you and your business write offs, let’s talk credit. How do you build business credit and not mount up personal debt at the same time? We consult many businesses who are instructed by dealerships that they also need their personal name on the paperwork, or worse yet, only in the company owner’s name.

The difference is being a guarantor, versus being a co-signer.

There is a basic difference between between being a guarantor versus being a co-signer. There can, however, be dramatic differences in how it affects you, and these small differences can be paperwork changes that can protect your personal assets.

Option one: be a co-signer. Most people are more familiar with this option; whether a parent co-signed on a loan when we were young to help us build credit, or as a couple and both signing for a household vehicle. Different states have different laws on how this is viewed, so make sure you know your rights and laws. This simply put, means two names are printed on the paperwork, and both parties sign for the vehicle. In the case of a business, a co-applicant is an officer of the company and has their personal name and credit information tied to the loan on all of the paperwork.

Option two: be a guarantor. This is when an officer of the company who is looking to build the company’s credit adds their personal information on the loan application, but their name stays off the title and registration. The ultimate goal is to build the company’s credit enough to stand on it’s own, without the financial assistance of the officers of the company. This takes time and risk. So, to make it easier and less risky for business owners, banks offer the option to be a guarantor.

The application process itself is typically the same between a co-signer and guarantor. The company would supply the business info, federal tax identification number, an officer’s information and social security number of the officer. This officer’s information will establish the basis for the loan approval. Much like a young adult may turn to a family member to co-sign for a loan to start building their own credit, a young business will need the same help to get started. The advantage here is that businesses have the option to be a guarantor.

The advantage to the company officer as a guarantor is that the debt does not show up on their personal credit. The credit inquiry from the bank will appear, but the monthly payments and total debt owed will remain off of their personal credit. The exceptions to this vary from bank to bank, but unless there are late payments or the loan defaults, it will stay off of the officer’s credit.

Example: A business has 5 trucks or equipment loans that a business owner is a guarantor on, and the business owner has two personal vehicles with loans. The personal credit report will not show 7 loans, it will only show the two loans on their personal vehicles.

Each bank will have documents that the business officer will need to sign acknowledging that they understand payments will need to be made even if the company dissolves or stops making payments.

The other advantage is personal liability. If a personal name is on the registration and title of the vehicle, or equipment, then that person is equally liable for that equipment. Therefore, if the vehicle is in an accident, and deemed to be at fault by a company driver, that company and any person on the title are open to litigation directly. It is much more difficult for lawyers to target officers of a company if their names are not directly on the titles of the vehicles in this example.

Always consult your accountants, insurance agents, and seek legal counsel on how to best protect you and your company before making decisions. Since laws, and what is available vary from state to state it is always best to make sure you know your options before it is too late. No one wants to see business owners work so hard to build their business from scratch all to lose it over some simple paperwork changes.