This can be problematic if you don’t have the cash to cover everyday business expenses and start or grow your operation. Let’s dive deeper into getting a business loan after bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal process that can help individuals and businesses get rid of all or part of their debt or repay a portion of what they owe. The three type of bankruptcy, which are overseen by federal bankruptcy courts include:
- Chapter 7: This is also known as liquidation bankruptcy, Chapter 7 is for those with a limited income who are unable to repay at least some of their debts. During Chapter 7, everything you own (including your house) will be sold to pay off credit card debt, medical bills, and other unsecured debts.
- Chapter 13: Chapter 13 or wage earner’s bankruptcy may be an option if you earn sufficient income and don’t qualify for Chapter 7. It involves a three to five year repayment plan where you pay off all or a portion of your debts. Your unsecured debts will be discharged at the end of period.
- Chapter 11: Chapter 11 is for businesses with an overwhelming amount of debt. If your business isn’t generating enough revenue to pay your bills, you may shut it down or file for this type of bankruptcy. Chapter 11 comes with a reorganization plan that will describe how you’ll pay off your debt.
How Bankruptcy Impacts Your Credit Report
Unfortunately, bankruptcy can stay on your business credit report
for up to 10 years. When lenders pull your credit and see bankruptcy, they'll automatically view you as a risky borrower. They may deny you for a loan or extend an offer with a high interest rate and unfavorable terms.
The good news is that the effect of bankruptcy on your credit score will lessen over time. As long as you make timely payments and prove that you’re a responsible borrower, you can open the doors to better financing options in the future.
6 Steps to Obtain a Loan After Bankruptcy
While it can be tricky to get a business loan after bankruptcy, it’s not impossible to get approved. By following these steps, you can increase your chances of getting approved for the financing you need to successfully run your business.
1. Wait Until Your Bankruptcy Has Been Discharged
You may be tempted to look for business loans after business or personal bankruptcy right away, even when your case is still open. If you’d like to boost your likelihood of securing a loan, wait until your case has been discharged.
After this waiting period, check your credit report to ensure that the discharge is noted. If it has been discharged, you are likely safe to start your loan application.
2. Keep Debt to a Minimum
Once you file for business bankruptcy, you should do your best to keep your debt to a minimum. In addition, you should avoid opening up new credit accounts. Instead, focus on paying off as much debt as you can, as quickly as possible.
Paying down your debt is essential, especially if your goal is to rebuild your credit score after bankruptcy.
3. Do Your Research
In most cases, business lenders won't approve you for a loan if they find out that you’ve filed for bankruptcy. However, there are some lenders with more lenient business loan requirements who are open to borrowers with bad credit, as well as those who have been through bankruptcy.
Chances are you’ll have to look at online lenders instead of traditional lenders like banks or credit unions. As you conduct research and compare potential lenders, be sure to read reviews so that you select a reputable lender with a positive track record.
4. Create a Compelling Business Plan
A business plan
is a document that outlines your business's operational and financial goals. You can think of it as a roadmap with detailed plans and budgets you’ll follow to steer your organization toward success.
Take the time to create a thoughtful, comprehensive detailed plan as lenders will likely look at it when they review your application for a loan. Your plan can inform them that you have a business with strong potential and will earn enough money to repay your loan on time.
5. Write a Bankruptcy Statement
Lenders will want to know why you filed for bankruptcy. Therefore, write up a statement that answers this question concisely and attach it to your business plan.
However, you should be honest without oversharing, as this can make you sound desperate or defensive. The statement you write should also show that you're responsible with finances despite your roadblock.
6. Look for a Co-Signer
A co-signer can be anyone you trust who promises to repay your business loan
if you are unable to. If you can find a co-signer with a strong credit history like a business partner or a spouse, you’ll position yourself as a less risky borrower. This can increase your chances of getting approved for a loan.
Conclusion: Financing is Possible After Bankruptcy
Bankruptcy may give your business the fresh start it needs. However, it can also make it a challenge for you to obtain a loan. Fortunately, you can navigate the situation and obtain the financing you need. It may just take some time and strategic planning.
Once you take out a loan, make timely payments so that you don’t end up in another situation where you’re stuck with an unmanageable amount of debt.