Many people are turning toward opening and running their own businesses in today’s economy. While many benefits and potential rewards are associated with being an entrepreneur, it also requires you to carry all the risks on your shoulders. Many entrepreneurs attempt several business ventures before they are successful, and they may need financing – even if there has been a bankruptcy in the past.
If you are a small business owner looking for a new beginning, you’ll be happy to know that getting approved for a business loan after bankruptcy is possible. It will require dedication, effort, and a sound strategy, but the lingering effects of bankruptcy can be overcome.
The Reality of Bankruptcy: A Chapter 7 bankruptcy remains on your credit history for ten years, and a Chapter 13 filing will be there for seven years. Credit scores will drop significantly, typically between 130 and 240 points, depending on your credit score. Nevertheless, redemption (in the form of new business financing) is available with time.
8 Strategies to Obtain a Business Loan Post-Bankruptcy
- Secured Credit Cards: Secured credit cards require a cash payment/deposit as collateral, and that amount represents your line of credit. While it’s not an ideal scenario, secured cards provide a method to rebuild credit and enjoy the flexibility of having a credit card.
- On-time Bil Payments: The most effective way to recover from bankruptcy is to pay all your bills promptly. Over time, creditors will see you are serious about being fiscally responsible.
- Lending Alternatives: Traditional banks and lending institutions often cannot offer a loan too soon after bankruptcy — federal and state regulations prohibit them. Alternative lenders may be willing to provide term loans and lines of credit, but borrowers should expect higher interest rates and fees. Asset-based loans are yet another potential option, as is crowdfunding, which will require an intensive marketing campaign and a loyal customer base.
- Cosigners: Some lenders permit loans after bankruptcy with a qualified cosigner. Significant risk falls to the cosigner, who becomes responsible for late loan payments or a default. They also garner no upside regarding their own credit score if payments are made on time – making co-signing a risky proposition without much benefit.
- Business Plans: When seeking a new business loan, the more prepared and detailed you are about your plans, the more faith a lender is likely to have in your efforts.
- Lender Explanations: When asking a lender for a business loan after a bankruptcy, entrepreneurs are advised to create a timeline accompanied by a set of factual documents that explain their bankruptcy. Often, a one-time major event resulted in the financial difficulties that caused the bankruptcy – and that event, such as a divorce or medical emergency – is not expected to reoccur.
- Credit Debt Level: Those looking to finance a new business should strive to keep revolving credit debt as low as possible; below 20% is recommended. This proves to banks that you are not extending yourself beyond your financial limits and can afford to make new payments. Lenders will review personal credit reports to ascertain if finances are being managed responsibly.
- Friends and Family: If getting a loan after bankruptcy is not likely to happen through lenders, some may consider asking friends and family. The Federal Reserve Bank 2020 Small Business Credit Study revealed that 56% of business owners relied on friends or family and personal funds to finance their business between 2015 and 2020.
Of course, sometimes, it is a waiting game. Perspective business owners can save money, build their credit, and work to get experience in their field as they prepare for the time when lenders are again ready to extend a loan.
Understand the Process
If you are considering bankruptcy and want to understand all of the ramifications to your creditworthiness in the future, call the law offices of Richard V. Ellis. We are here to help and ensure you get back to living life – and building your business.