Filing personal bankruptcy can help you manage your debt situation, either through a restructured repayment plan or by wiping out most, if not all, of your debt entirely. But it can also harm your credit history, making it difficult to get approved for business financing.
That doesn’t mean it’s impossible, though. Here’s what you need to know about getting a small business after bankruptcy.
Bankruptcies linger on your credit report
A bankruptcy can remain on your credit report for up to 10 years, depending on the type you filed. During this time, lenders may view you as a risky borrower.
That said, both creditors and credit scoring models tend to give more weight to recent information over older information. So as long as you use credit responsibly after the bankruptcy discharges, its effect will diminish over time, giving you more financing options for your business.
Having a business credit history will help
If your business is brand new and you haven’t had a chance to build a business credit history, lenders will rely on your personal credit history to determine whether to extend credit. With a recent bankruptcy on your credit report, your chances are slim with most lenders — at least if you want to avoid super-high interest rates.
If, however, you’ve been in business for a long time and have established a good credit history for your company, creditors may focus more on how you manage your business finances instead of your personal life.
If you don’t yet have a business credit history or your profile is thin, work on building that along with your personal credit.
You can still make a strong case
Your personal credit history isn’t the only factor business lenders consider when you submit a loan application. You’ll also have the opportunity to write up a business plan and share why you’re uniquely qualified to run your business effectively. Ultimately, they’re more concerned about your business succeeding.
You may also have a chance to explain the bankruptcy. If, for instance, it was a consequence of some extenuating circumstances, such as divorce or oppressive medical bills, they may not view you in the same light as they would a business owner who filed bankruptcy after mismanaging their finances.
You can rely on a partner
If you have a creditworthy business partner, you may be able to get approved for a loan with favorable terms if you have them apply for the loan or co-sign on a loan application with you. If you don’t have a business partner, you may be able to use a spouse or a close family member instead.
Before you go that route, though, keep in mind that a co-signer will be equally responsible for paying back the debt. So if your business fails and you can’t repay it using your personal assets, it could destroy both your and their credit. Pick this path only if you have a trusting relationship and have the means to pay back the loan if your business can’t.
Some lenders are more bankruptcy-friendly
While your lender options will be limited with a bankruptcy, and you can generally expect a higher interest rate, some creditors are more willing to work with business owners in that position than others.
For example, you may be able to get a business loan with Prosper, BlueVine, Fundbox, or Lighter Capital if your bankruptcy was discharged more than a year ago. Some other lenders that offer short-term loans and merchant cash advances may have less stringent standards.
Before you apply, though, consider calling a lender to find out more about their policies and your chances of approval based on your situation.
There are alternative financing options to consider
If you’re having a hard time finding a lender that’s willing to work with you, it may be worth considering going an alternate route to get the financing you need. Here are a few options to consider:
- Crowdfunding: If your business is product-based, you may be able to get financing through crowdfunding sites like Kickstarter and Indiegogo. Prospective customers who are interested in your product can make small investments in exchange for what you want to sell them anyway. But you don’t have to give up any of your equity or pay back what you receive.
- Microloans: There are many non-profit organizations offer microloans to startups and may have lower approval criteria than traditional commercial lenders. Some, like Kiva, don’t check your credit at all. Instead, they rely on you inviting “lenders” in your circle of influence to lend you money in $25 increments. If you get enough interest, Kiva opens up your request to its network. There’s no interest on Kiva’s loans.
- Angel investors: While it’s not ideal to give up some of your equity in return for an investment, it may be one of your only options if your bankruptcy is recent and you need cash now. The good news is that angel investors will have an interest in the success of your business, and you may be able to get some valuable advice.
The bottom line
Filing bankruptcy can give you a new start, but it can also make your life a little more difficult for a while, especially if you’re a business owner. Fortunately, there are some options available. You may just need to take a little more time to research them and prepare your loan application to get the financing you need.
As you compare small business loans and alternative financing options, make sure to get the details on how bankruptcy can affect your chances of getting approved. Asking this question upfront can save you a lot of time as you narrow down your selection.
This article was originally written on April 16, 2019 and updated on October 17, 2019.
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