Have you fallen on difficult times and filed bankruptcy? This can happen to anyone, but if you’re a small business owner or looking to become one, you have questions.
The biggest problem you will face following a bankruptcy will be reestablishing credit. The bankruptcy will not prohibit you from starting a new business.
Because you won’t be able to file for bankruptcy for another seven years, you are actually seen as less of a credit risk. You will have to explain to financial institutions what caused the bankruptcy.
Once you demonstrate changes in your financial situation, getting a small business loan may be easier than you think.
Everybody deserves a second chance. Bankruptcy is not the end of the road. You can get a small business loan after bankruptcy.
It may be difficult at first, but read on to find out how you can do it.
Starting Over and Keeping Your Debt Down
Following a bankruptcy, you should work hard to avoid the financial errors that affected you in the first place. It may take time to effectively build credit again.
You will need to be able to keep your debts down. Try not to open any unnecessary lines of credit and focus on existing ones.
You will need to be able to prove that you have been paying your mortgage, car payments, etc.
On top of that, you will need to be able to provide proof of income. Your income should be enough to effectively pay back your loan.
If you can do this, you may be able to secure a business loan. But not so fast!
Have a Proper Business Plan
You will not be able to secure a business loan without a business plan. Potential lenders want to see that you are organized and ready to answer any questions.
If you are planning to open a restaurant or other business with a high failure rate, be prepared.
You will need to be able to explain your business objectives, products and services offered, target customers, competition, and more. You will need to understand the future financials of your new business.
This includes how you will be able to grow your business in the future.
You may choose to speak with someone with more experience. They can help you make your business plan more appealing to lenders.
Are You Starting a New Business With a Loan After Bankruptcy?
It is common to file personal bankruptcy when a business starts to fail. This keeps your personal credit protected.
It can be difficult to keep your personal finances separate from your business finances. The business entity should remain wholly responsible for any debt incurred, but creditors are critical.
They know that new businesses are prone to failure. Someone involved needs to show financial responsibility.
Are You Starting a Similar Business?
If you plan on doing this, consult a business lawyer. A business cannot discharge its debt with a Chapter 7 bankruptcy.
If the two businesses are similar, creditors may attempt to collect from the new business. If you start the new business with the intention of avoiding the debts, you can be charged with fraud.
Starting a business anew after bankruptcy can be a counter-productive mood. It may end up costing you more in the long run.
What Caused Your Bankruptcy?
When you go to apply for a loan, you will need to provide an explanation for your bankruptcy. It may have been the result of a divorce, traumatic accident, or illness.
Write a short explanation about it on your application. This will also help you demonstrate that your financial situation has changed.
Make this statement brief, and avoid sounding desperate.
A lender may ask you to further explain some of the information in your statement. Be prepared to answer any questions they may have for you.
Increase Your Chances
Your personal credit will come under scrutiny when you apply for a business loan. There are some easy ways to increase your chances for approval.
Aside from preparing a business plan, you may wish to apply for a loan with someone who has good credit This will make you seem like less of a risk to financial institutions.
You may also be able to secure funds from willing investors.
Choose a Lending Institution
There are many different financial institutions to choose from. Likely, you will need to apply for a loan at multiple lending institutions.
It may be difficult to secure a loan from a big bank. Typically, they serve well-established businesses. If you are looking to get a loan from a big bank, choose a Small Business Administration-backed loan.
Take caution with the SBA, though. Often, you need to put up a personal asset in order to secure a business loan.
You may wish to search for an alternative lender. Often, these lenders are more flexible than traditional banks and credit unions.
Remember that investors, hedge funds, and equity firms may offer direct lending to small businesses. These types of lenders will be more willing to loan money to new businesses or businesses with shaky financial histories.
You need to do a bit of shopping around to find the best lending options.
When You Can’t Get Financing
Financing may not always be an option. If you find that you cannot get financing for your new business, that doesn’t mean you have to give up.
You may need to go another route. Try operating with minimal startup costs.
You may need to reinvent your dream a little.
You can also start out working as a subcontractor to reduce your operating costs. You can also take advantage of independent contracting opportunities in the “gig” economy.
Filing for bankruptcy should not stop you from starting a new business. It may be more difficult to secure a loan after bankruptcy, but it’s not impossible.
Look for banks and lending institutions that specialize in small business loans. These institutions may be more lenient with their terms and conditions.
Look into credit unions, and remember that you can apply for multiple loans. You will be able to compare rates.
Because of your financial history, you may need to provide collateral in order to secure the loan.
When you’re ready to continue on your journey, you can find more about starting a new business here.