For business owners who have previously filed for bankruptcy, one looming question is often, “Can I still get a small business loan?” And the answer is: It depends. Here’s how bankruptcy can affect your ability to obtain a loan — along with some advice for making your business more attractive to lenders despite bankruptcy.
Waiting periods after bankruptcy
Bankruptcies usually stay on your credit report for about seven years. When applying for a loan after this period, your bankruptcy will not affect your ability to get a loan. However, if it is still on your credit report, it will have a significant impact on your creditworthiness. In many cases you can still apply for a loan after a waiting period of about two years. But the longer you can wait, the more likely you are to get a loan. You might find some lenders are more willing to work with applicants who have a bankruptcy on their records, but in most cases, the fees and interest rates will be much higher.
Personal vs. business bankruptcy
If you own a business with established credit, you can obtain loans based solely on your business credit. That keeps a personal bankruptcy out of the picture. However, if your business is new, your personal credit score will be a deciding factor in whether you qualify for a loan. If a personal bankruptcy or business bankruptcy is preventing you from obtaining a loan, you’ll need to work at rebuilding your credit.
Tips for rebuilding your credit
Separate business and personal credit.
Before you do anything else, make sure you are able to separate your business and personal finances. Like we mentioned before, if you’re a new business, this may not be possible. But established business owners who have their business and personal finances tied together are taking unnecessary risks. If you haven’t taken steps to do this yet, it should be your first priority.
Use your assets as collateral for new loans.
Borrowers with bad credit often have better chances of obtaining loans if they have assets they can put up as collateral. Loan collateral reduces a lender’s risk and makes them more willing to approve your loan application. There are a couple of catches, however. As we mentioned before, it’s important to keep your personal and business finances separate. You don’t want to put your house up for a business loan and find yourself without a place to live if the business fails. Also, if you’ve gone through a bankruptcy, you may have little or no assets to use as collateral.
Take things one step at a time.
When you apply for a loan following a bankruptcy, start small. Don’t immediately request a $500,000 loan. Take smaller loans and repay them in a timely manner to establish your ability to make payments and a pattern of success for your business.
Provide a factual explanation of the circumstances that led to bankruptcy.
You can provide explanations along with your credit report to explain what led to your bankruptcy. Sometimes special circumstances can lead to major financial problems. In evaluating your application, lenders will consider how unforeseen events like health problems, natural disasters or divorce can contribute to financial troubles without necessarily indicating an unwillingness to repay your loans.
In the end, it’s important to know that every lender establishes different rules for eligibility. If you receive a no on your first try, that doesn’t mean it’s time to give up. Keep working hard to rebuild your credit and reach out to experts in small business lending for options and advice. Business simply doesn’t have to stop after bankruptcy. Although having a bankruptcy on your credit report will certainly create more obstacles for you to overcome during a credit search, if you are diligent in building up your credit, you’ll find more and more options open up to you as you get farther away from the bankruptcy.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.