Can I Get Business Loans After Bankruptcy?

“Can I still qualify for business loans after bankruptcy?” “

This is a question that small business owners and aspiring entrepreneurs who have suffered this fate may ask themselves when seeking financing. If you want a fresh start, a past bankruptcy doesn’t have to be a life sentence. It is possible to get approval for a business loan after bankruptcy.

In reality, you will need to strategize and put in extra effort. And it may take a while and involve a series of small steps, but over time it is possible to overcome the effects of bankruptcy on your financial outlook.

Bankruptcy will remain on your credit history for 10 years in the case of Chapter 7 and seven years from filing Chapter 13. Also, expect your score to drop – 130 to 240 points depending on your credit score. , according to a mock FICO score. Nonetheless, there are steps you can take to improve your chances of getting this business loan or find capital from alternative sources.



How to get a business loan after bankruptcy?

Obtaining a business loan following a Chapter 7 or Chapter 13 bankruptcy will be tricky, especially in today’s economic environment. The following strategies can help you:

1. Get a secure credit card

Secured credit cards require cash payment as collateral (this is why they are called “guarantees.”) This deposit serves as a line of credit. While not ideal, secured cards are a way to replenish your credit and have the functionality of a credit card for purchases.

2. Pay your bills on time

We cannot overstate the importance of paying bills on time. It has the greatest impact on your credit score of all the contributing factors. If you do this long enough, you’ll prove to lenders that you can handle your finances and stay out of trouble.

3. Consider other loan options

Banks and other traditional lenders may be reluctant to offer a loan after bankruptcy – federal and state regulators are locking their hands. One option is that of alternative lenders who offer term loans and lines of credit, albeit at higher interest rates and fees. Your chances of getting small business loans for bad credit are higher; just understand the risks and potential liability if you are unable to make payments.

Income-based financing, such as cash advances from merchants or invoice factoring, is another option, provided your business is making strong sales. These funding sources are generally not concerned with your credit score, although they may perform a soft credit check on your personal or business credit.

Asset loans are another option to consider, especially when going to a bank.

“Traditional lenders are going to look to cash flow, assets or some type of security,” said Luis Salazar, a bankruptcy attorney in Miami, Florida, in an interview. “The best collateral is strong collateral that you know you can sell to get your loan back. “

Another option, crowdfunding, is not dependent on credit scores, but you will need to invest in a marketing campaign or have a loyal following ready to participate.

4. Get a co-signer

Some lenders allow you to apply for a loan using a co-signer. The risk for the co-signer is that they become responsible for the loan if you don’t make the payments on time or, worse, if you default. Plus, they don’t get any benefits under their belt if you pay back on time. Make sure the person understands these risks before signing on the dotted line.

5. Present a business plan

Hari R. Ender, Bankruptcy Attorney, written for Nolo.com, said, “Before you try to get credit for your business, make sure you have a solid and organized business plan to present to potential lenders. The industry in which you are looking for a loan could also make a difference to your success.

6. Share bankruptcy details with lenders

Marina Vaamonde, a commercial real estate investor in Houston, Texas, advises business owners to create a timeline along with a set of factual documents that will allow them to share their bankruptcy story.

“Include an overview of how and why you went bankrupt,” she said. “Have a detailed explanation with examples of how you ran your business and your finances after bankruptcy. The presentation should allow the lender to learn more about your situation and have a more positive impact on your request.

There is a place on your credit report to submit a brief explanation of the major event that caused your financial hardship and how it is different now. Typical causes are divorce, hospital bills, prolonged illness or a car accident.

7. Avoid “reaffirmation agreements”

You can volunteer to make paying off your creditors part of the contract – a “reaffirmation agreement” – even though you can pay off your debt. Salazar says it’s a bad idea that you should avoid.

“I have often had clients who said they wanted to include the repayment of certain creditors in the terms of bankruptcy,” said Salazar. “I tell them that you can always voluntarily repay someone, but don’t go bankrupt and commit to repaying them, even if you feel an emotional and moral obligation. If your fortunes are spinning, you can still send money, but don’t agree to do so in the contract.

8. Keep your credit debt level low

Keep your revolving credit debt as low as possible – below 20% is better – to show that you are within limits and can afford to make payments. Also remember that your personal credit affects business loans. (This is especially true for minority company owners who rely heavily on personal scores.)

“If you run out of money, make sure you don’t take out more loans after bankruptcy, as it could hurt you,” said Leslie H. Tayne Esq., Founder and Chief Lawyer at Tayne Law Firm, in an interview. “After bankruptcy, it is not uncommon to receive credit card offers. Don’t put your personal credit on the line by taking all you can and maximizing your available credit.

She added that lenders will look at your personal credit report to see if you’ve managed your finances responsibly. “A credit report says a lot about a person,” Tayne said. “Lying down again could demonstrate a pattern of behavior, which would make it more difficult to get a loan. “

9. Follow the route of friends and family

If you’re still having trouble getting a loan after bankruptcy, consider turning to your friends and family. The Federal Reserve Bank Small Business Credit Study 2020 (PDF) found that 56% of business owners have relied on friends or family, as well as personal funds – the largest source of funding – to finance their business in the past five years.

If you decide to go this route, find someone with good credit who can add you as an authorized user to their account. Your use of credit is reported to both your name and the name of the primary account holder. In addition, you may be able to get a friend or family member to co-sign a loan. Just make sure they understand the risk.

10. bide your time

Our last tip is to wait. It takes up to 10 years to discharge a bankruptcy. If you can’t wait that long to apply for a business loan, you may have to wait at least a year and possibly longer. Even alternative lenders require a waiting period before considering a loan. SmartBiz, for example, requires a three-year waiting period while Funding Circle requires seven. Some, like OnDeck and DealStruck, are more lenient. They only need a two-year waiting period.

Bankruptcy and Loan FAQs

The above points will help you create a strategy for getting a loan after bankruptcy and improving your credit scores. The answers to the following frequently asked questions provide additional information on the impact of bankruptcy on business lending:

Can you get new business loans while you are still in Chapter 13?

Getting a business loan during Chapter 13 bankruptcy will be difficult, but not impossible. The Bankruptcy Code allows you to take on certain types of new debt, but you will need to get court clearance and be up to date on your plan payments.

What happens to my existing business loan if I file a Chapter 7 or Chapter 13?

Filing for Chapter 7 bankruptcy releases all personal liability for the business loan, but not the debt itself. The reason is, unless you are a sole proprietor, the business is a separate legal entity and remains responsible for replaying the obligation.

A small business established as an LLC or corporation cannot file Chapter 13 because it is intended for personal use only. However, sole proprietorships can file Chapter 13, reorganize, and repay personal and business debts, including loans.

Can I pay off an SBA loan in bankruptcy?

Many people mistakenly believe that because the SBA is a federal agency, loans are not dischargeable in bankruptcy. The truth is, you can pay off an SBA loan. There is a catch, however. If you have pledged assets as collateral, bankruptcy would not remove the lien and the lender can foreclose or repossess that property.

Conclude

Although bankruptcy will drastically reduce your credit score and stay on your credit report for 7-10 years, you may still be eligible for a business loan. And because you might have less debt and can’t file for bankruptcy again right away, some lenders may see you as less risky.

Take action now to improve your personal and business credit so you can demonstrate that you are a better credit manager. While some lenders do not require your bankruptcy to be fully discharged, the longer it has been since you filed your case and the longer you have retained your debt, the better.

If you are a business owner who is considering filing for bankruptcy, talk to a bankruptcy lawyer. He or she can clearly explain the laws and show you the best options to protect your business interests.

Image: Depositphotos.com


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