Will Personal Bankruptcy Affect Your Chances of Getting a Small Biz Loan?
Bankruptcy is a complicated process. It can be very stressful and, in the case of a Chapter 13, leave you paying all or part of your debts back to your creditors for up to five years under a court-supervised plan.
Getting a small business loan after a personal bankruptcy may be challenging, but depending on several factors, you may be in a better position than you think. Review this checklist to find out the best course of action:
1. Establish a Small Business Credit Score
Separating your personal credit history from your business credit history can minimize the negative effects of any personal credit problems. To determine whether or not you have a business credit file, contact credit information services such as Experian.
If you have an existing business credit file, it will already contain information about your business credit. Having this proof of official separation between your personal and business finances is essential when trying to get a small business loan after a bankruptcy.
Another way to show this separation is by developing a business credit report with one of the credit reporting bureaus. For example, here is what a sample Experian business credit report looks like.
2. Mention of Business in Personal Bankruptcy
In several cases, a small business may only have value to its owner. For example, a one-person marketing boutique may only have the owner’s expertise as its main asset. Creditors can’t come after the business for payment and will pursue the individual personally.
Failing to disclose your small business in your personal bankruptcy filing is dangerous. During your bankruptcy process, your trustee – the person in charge of overseeing your case – must be aware of all of your assets to determine if they could be used to pay your creditors.
If you were to have valuable assets, such as vehicle, equipment or inventory, then your creditors would try to seize those business assets. Not declaring those assets during bankruptcy and then trying to use them as collateral for a small business loan could open the door to legal problems.
Also, don’t try to protect your business assets by selling them or transferring them on your own before filing bankruptcy. Seek the advice of a bankruptcy attorney to prevent potential fraud charges or criminal penalties.
3. Small Business Loan: New or Existing?
Like in everything else, relationships matter when looking for business financing. If your business has an existing loan or had past loans with a bank, then the bank may be more lenient in its requirements. As long as you have been making your payments on time and providing requested documents, such as updated financial statements or current lists of accounts receivables, your lender may not be too concerned about your personal bankruptcy. This is particularly the case when you have a detailed small business credit history.
However, if you’re shopping around for a small business loan for the first time or haven’t worked with a bank before, you’re going to have a harder time securing a loan. All lenders have their own criteria to determine eligibility for loans, but first-time borrowers usually undergo more scrutiny. Lenders will most likely request your personal credit score.
4. Timing of Loan
The timing of your business loan is important as well. Remember that a Chapter 7 bankruptcy stays on your credit report for 10 years and a Chapter 13 bankruptcy remains for seven years.
Depending on the type of personal bankruptcy and date of filing, your credit history may already be free of any mention of bankruptcy, making it easier for you to secure financing for your business.
There are some banks that will still consider your application as long as you meet their specific guidelines for how long after a bankruptcy you can apply. Often, that waiting period is two years after your bankruptcy filing. While you can expect to pay a premium on that business loan, the credit may be a well-needed lifeline to ride out a tough period.
5. Business Plan
This is the most critical component of your loan application. Having filed personal bankruptcy puts extra pressure on having a solid business plan.
In your business plan, you need to provide details on how you plan to run your business, your expected revenues and operating expenses and your contingencies. Prepare your document using factual explanations and realistic figures.
Find out the requirements for business plans and other documents before you submit your loan application. Each financial institution has different criteria to make lending decisions.
Business owners with good separation between their company and personal finances, proper disclosure of business assets in bankruptcy filings and existing relationships with financial institutions may have a chance for receiving financing.