Here are things you can start doing today to get funding after a business bankruptcy
Every year, more than 20,000 businesses file for bankruptcy for a number of different reasons. While bankruptcy is far from the best option for most businesses, it does not necessarily have to be the end. There are several things that you can do starting today to pick up the pieces to recover from bankruptcy. In this blog post, we will cover how to get funding after a business bankruptcy.
One thing that you need to be aware of is that this process will play out for the next several years. A bankruptcy will stay on your credit report for several years, ten years in the case of a chapter 7 bankruptcy, and seven years for a chapter 13 filing. Your credit score will also fall tremendously – 130 to 240 points is not unreasonable, depending upon your starting credit score.
Fortunately, there are things you can start doing today to put your business on a better financial footing when your situation has sufficiently recovered, that you can start borrowing again.
How to get funding after a business bankruptcy?
Getting a business loan following a Chapter 7 or 13 bankruptcy will be difficult, if not impossible.
The following strategies can help your business in the long term.
Pay your bills on time.
This is perhaps the most critical factor in recovering from a bankruptcy, having the single most significant impact on your credit score. If you do this long enough, you demonstrate to lenders that you can stay out of trouble and manage your finances.
Get a secured credit card
A secured credit card is the first step to building a solid credit history and overcoming bad credit. A cash deposit backs a secured credit card (hence, “secured”). You can use it either as a regular credit card making purchases or as a debit card to make withdrawals. When you open your account, make sure that you keep it in good standing so that your deposit is not at risk.
Get a cosigner
Some lenders may allow you to apply for a loan with a cosigner. The risk is on the cosigner in that they are responsible for the loan if you miss a payment or default. The cosigner doesn’t receive any benefits from a credit standpoint if you repay on time. As a result, not everybody will cosign for you, and for those that do, don’t do anything to damage that relationship as they are putting a lot of trust in you.
Put together a business plan.
Some lenders may ask for a business plan as part of the loan application process. In addition to an executive summary that includes your company’s mission statement, it should consist of information on the company’s operations, legal and financial structures, capitalization needs, and cash flow forecasts.
Financial projections are essential. A good business plan will include past revenue and profits for the past several years if you have had any profits. It should also include a sales and profit forecast going out three to five years. Prospective lenders will use this information to evaluate whether you will have the funds to pay back the loan.
Consider alternative lending options.
Traditional banks and lenders may be reluctant to fund a loan after a recent bankruptcy. However, an alternative lender may make such a loan but be prepared to pay more in interest and fees as they are taking on additional risk. Your chances of getting a loan for bad credit are higher, so you must understand the risks and potential liability if you cannot make your payments.
Revenue-based financing such as invoice factoring or a merchant cash advance may be another option if your business is making sales. Alternative lenders are less likely to be concerned with your credit score, but they will likely run a soft credit check on your personal or business credit.
Avoid reaffirmation agreements
Avoid agreeing to a reaffirmation agreement as part of the agreement to get a loan. A reaffirmation agreement acknowledges the debt made in a loan. This type of documentation allows the borrower to continue paying back the debt even after filing for bankruptcy. It also protects lenders from being denied repayment because of a Chapter 7 filing. Under this agreement, you are both reaffirming your responsibility to repay the debt and agreeing not to discharge it in a bankruptcy proceeding. If things turn around for you, you can always send money but don’t agree to do it as part of a contract.
Go to family and friends.
If you are having problems getting a loan after bankruptcy, consider turning to friends and family. According to a recent report by the Federal Reserve, 56% of business capital came from family, friends, and personal funds. In addition to providing cash, they can also cosign on a loan application with you. However, use this option with caution.
Keep your credit debt levels low.
Keep your revolving credit debt low. Ideally, less than 20%, if possible. Revolving credit is an agreement that permits an account holder to borrow money up to a set dollar amount while repaying a portion of the current balance due in regular payments. This is in contrast to fixed credit, whereby you borrow a fixed amount.
Keep in mind that your personal credit affects your business borrowing. As a result, keep your personal credit under control by staying on top of payments and not maxing out all of your cards. Prospective lenders will look at your personal credit as an indicator of how you will manage your business finances.
The last thing to remember is to be patient. It takes up to 10 years to discharge a bankruptcy. Even alternative lenders will require a waiting period before they will consider making a loan. Exactly how long after bankruptcy before they make a loan will vary from lender to lender.
Wrapping it all up.
Hopefully, these tips will help you formulate a strategy to get your finances in place following a bankruptcy. It will take time to recover from bankruptcy. However, these are all actions you can start with today that will help you get funding after a business bankruptcy in the future.
If you are a business owner considering bankruptcy as a last resort, speak with a bankruptcy attorney who can advise you of the law and how to proceed best while protecting your business.
If it has been awhile since your business bankruptcy and you have been doing the items listed here, contact us or call (800) 795-3919 to see if you qualify for funding.