‘Bankruptcy’ – there are certain financial, emotional, and social stigmas attached to this word. Although you have to face various financial ramifications when you file for bankruptcy, it is not the end of the road.
Unfortunately, this situation is all too common – there are many examples of people who bounced back and went from rags to riches even after being bankrupt. From Will Smith and Lady Gaga to Walt Disney and Henry Ford – a surprising amount of famous names have filed for bankruptcy at some point in their lives.
Whether you’re a veteran small business owner or an aspiring entrepreneur who has filed for bankruptcy and is trying to recuperate the situation, there are ways in which you can do this, with the help of a small business loan.
Yes, you read it right! Getting a business loan after bankruptcy is possible.
However, securing a loan in a financially unstable condition may be more difficult. A bankruptcy can stick to your credit report either 7 or 10 years from the filing date. Since lenders often consider several factors such as type of bankruptcy, the level of risk, and the current lending conditions, you may or may not be able to get credit during the bankruptcy.
Nevertheless, developing a smart strategy, expending extra effort, re-establishing your credit, and responsibly using financial tools at your disposal can improve your chance of getting a small business loan or find capital from alternative sources.
How to Get Small Business Loan after Bankruptcy?
Rebuild Your Credit
Even after bankruptcy, your credit score is one of the most important factors that lenders consider when approving your small business loan. If you want to avoid getting yourself into further hot water, it’s crucial to promptly start building your credit after bankruptcy.
Though it will be challenging, it’s possible to rebuild your credit with hard work, reducing costs, and responsible spending. Even though the negative mark can linger on your credit report as long as 10 years, if you follow through the financial responsibility, you could be back to lenders for a small business loan in as few as two years.
Here are some of the many important steps to rebuilding your credit :
- Create a budget and stick to it to stay on top of your finances
- Build an emergency fund for unexpected expenses
- Monitor your credit cards on a regular basis to see if your efforts are having a positive impact on it. If you see any error or incorrect information, make sure to report and address it.
- Consider a secured credit card. Cash payments that serve as your collateral of line and help you rebuild your credit.
- Pay your bills on time and if possible, set up auto-pay for all your bills
- Keep your balance small – somewhere below 25% of your available credit
- Take smaller loans and repay them timely
- Practice good financial habits like committing to a budget, making more than spending, paying bills ahead of time, eliminating credit card debt, setting saving goals, etc.
Consider Alternative Lending Options
Due to federal and state strict regulations, it may be extremely difficult for you to get a business loan from banks and other traditional lenders after bankruptcy. When you’re having a hard time finding a lender that’s willing to work with you, it may be worth considering alternative financing options.
Some alternative lenders offer businesses with bad credit, short-term, term-loans, and lines of credit, but those often have ultra-high interest rates and fees. Though these lenders are willing to consider your loan application during bankruptcy, it can also lead to a debt trap if you’re unable to make payments.
Besides, there are a few other types of asset-based loans available to business owners after bankruptcy such as merchant cash advance, invoice financing & factoring, crowdfunding, and angel investors. These financing options can help you survive your business in tough times by smoothing over bumps in cash flow. An asset-based loan is yet another great option when securing to cover expenses or investment after bankruptcy.
Prepare a Solid Business Plan
Besides having charisma, negotiation tactics, and great communication skills, you should have also a solid organized business plan to present your opportunity to the lenders.
Before starting an online application, create a business plan that will get approved for a business loan. Outline your business plan, what products or services you offer, what problem you’re solving, and who are your competitors? Besides, let your lenders know why you need this money and how you’re going to use and repay your loan.
Take your Time
Lenders may be reluctant to offer you a loan right after the bankruptcy. Moreover, applying for different loans and credit cards to get your business back on the track only added to the stress. This can lead to a lower credit score and also raises red flags for potential lenders.
While there is no fixed time specified to consider your loan application again, it’s recommended to apply with a gap of two years after bankruptcy. Generally, bankruptcy will disappear from your credit report after 7 to 10 years, you can take 1-2 years to evaluate the problems, and manage and rebuild your finances. After the gap, when you apply for an advance again, these initiatives can be the determining aspects in your favor.
Keep your Debt Down
Your chances of getting a business loan may increase if you’re successful in keeping your credit debt down after bankruptcy. Try to keep it as minimum as possible (below 20% is best) – to win the trust of lenders and make them confident that you can repay what you borrow. By cutting the size of your debt, you represent yourself as being responsible and assure them that you can repay any debts.
Explain Your Bankruptcy
Share a detailed explanation of your bankruptcy with your lender that describes your circumstances well. What are the reasons that let your business to default? What’s your business plan to fix the situation now? And how you have been managing your business and finances after the bankruptcy? Sharing these important statements will allow your lender to know and understand your situation and have a more positive impact on your application.
Get a Co-signer or Co-applicant
If your credit history has been severely affected by bankruptcy and you can’t qualify for a loan, it’s a great idea to apply with a co-signer or co-applicant. If you have a business partner, friend, or a close family member who has good credit history can help you get a loan in the challenging times.
Although this can be risky for the co-signers as if you default or fail to make payments on time, they become responsible for your loan. Moreover, repaying on time will also not provide any benefit to a co-signer. Make sure you discuss all the risks before allowing a loved one to sign on the dotted line.
Talk to Your Family and Friends
Last but not least – a great way to build credit more quickly is to become an authorized user of one of your family or friend’s accounts whose credit history is good. When you’re added, you grant permission to use the account for withdrawing, deposing, and transferring funds to and from that account. It can help establish a credit history and improve your credit without legally responsible for paying the debt.
There’s a hope to give your business a strategic fresh start after bankruptcy. Although it takes a lot of hard work and a great business plan to fix your credit score and prove you have the ability to get new small business loans. Fortunately, there are some options to get your business back on track. You may simply need to set aside somewhat more effort to research them and set up your credit application to get the financing you need.