Declaring bankruptcy might be a viable solution if you are overwhelmed with business debt. However, it can affect your ability to get a small business loan. If you don’t have the cash to cover everyday business expenses and start or grow your operation, this can be problematic.
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. There are three types of bankruptcy which are the following:
- Chapter 7: this is for those with limited income who are not able to repay 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 11: this is for business who have a lot 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.
- Chapter 13: if you earn sufficient income but don’t qualify for chapter 7, this option is for you. It involves a three-to-five-year repayment plan where you pay off all or a portion of your debts.
How Bankruptcy Affects Your Credit Report
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 might 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 will be able to get funding in the future.
How to Obtain a Loan After Bankruptcy
It can be tricky to get business loan after being bankrupt but it’s not impossible. The following steps will help you increase your chances of getting approved for the financing you need to successfully run your business.
Wait Until Your Bankruptcy Has Been Discharged
You might be tempted to look for business loans after business or personal bankruptcy right away even if 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 is, you can start your loan application.
Keep Debt to a Minimum
Keep your debt to a minimum and pay off as much debt as you can as fast as you can. It is essential to do this if your goal is to rebuild your credit score.
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.
Create a Business Plan
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.
The Bottom Line
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.