All the challenges associated with securing a small business loan are magnified when a bankruptcy is involved. That’s not to say a small business loan is out of reach following a bankruptcy, but you and your business will be under even more scrutiny if a bankruptcy is on your credit report.
Because large national banks use a standardized credit formula to evaluate your creditworthiness, the odds of finding success there aren’t good following a bankruptcy. If you are seeking a traditional term loan, a small community bank or credit union, where a loan officer is more likely to sit down with you to discuss your situation, is probably a better option—but no guarantee of success. Non-bank small business lenders may also be an option provided it has been at least two years since your bankruptcy was discharged and you otherwise have your business’ financial house in order.
A bankruptcy will remain on your credit report for seven to 10 years. If your bankruptcy is outside that window, it should be no more difficult to get a small business loan than if you’d never filed. If it is has been less time and it still appears on your credit report, here are some suggestions to improve the odds when seeking a small business loan following a bankruptcy:
- Be patient: Because a bankruptcy on your credit report is basically a red flag to every lender you approach, it’s unlikely anyone will approve a small business loan in the subsequent year or two following the discharge of a bankruptcy. Usually, the longer it has been, the better. Although there are some lenders that might consider you a better credit risk because you can’t file again for several years—eight years for a Chapter 7 bankruptcy and two years for a Chapter 13 bankruptcy, you should consider that the exception rather than the rule.
- Rebuilding your credit should be the priority: It might feel like this is easier said than done, but there are things you can do to repair the damage done by a bankruptcy. A secured credit card (think of it like a prepaid credit card) is a good way to start. A secured credit card works in conjunction with a savings account that secures the line of credit. Your credit limit will be the amount in the savings account minus any fees associated with the account. To rebuild your credit you’ll need to make small purchases and pay the account on time every month. Keeping your credit card usage to 10 percent to 15 percent of your available limit is a good idea. A department store credit card or other store card is another good way to approach rebuilding your credit. You should also make sure your vendors report to the appropriate credit bureaus so your timely payments to them will be reflected on your business credit report. It’s important to spend time on both your personal and business credit profile following a bankruptcy.
- Start off small: Starting small with a secured credit card or other lower limit credit account, building a positive history, and over time increasing your limit is another solid strategy for rebuilding your credit. Slow and steady wins this race. Rebuilding your credit is all about consistency.
- Minimize your debt: Filing for bankruptcy should never be taken lightly, but it does provide the opportunity of a financial do-over. With that said, lenders will want to see evidence you can keep debt to a minimum and that you have learned how to avoid the financial pitfalls that likely contributed to your bankruptcy. Demonstrating financial responsibility following a bankruptcy may help convince a lender to offer you a loan. And, you should be prepared with evidence, such as credit card statements and mortgage statements to demonstrate you are able to meet your financial obligations in a timely manner.
- You can append your credit report: If contributing factors to your bankruptcy included extraordinary circumstances like a divorce, an extended illness, unforeseen disaster, or other mitigating circumstances, the Fair Credit Reporting act allows you to add a 100-word explanation to your credit report.
- Consider a Co-Signer: A partner or investor in your business with excellent credit may be able to help you secure a small business loan, provided they are willing to co-sign for you. This may reduce the risk for the lender, but in the eyes of the bank, they need to be prepared to take on any debts you incur that you are unable to pay. If you don’t have a business partner, sometimes a spouse or other close family member can be an alternative.
There is no shortcut to rebuilding your credit following a bankruptcy. Lenders need to know that you are willing to repay your debts and meet your financial obligations as well as that you are able to do so. Unfortunately, a bankruptcy doesn’t help make that case. As a result, you’ll need to be straightforward with the lender, honest about the circumstances surrounding your bankruptcy, and patient when lenders show a lack of interest. It will likely take more effort, but a small business loan is not out of the question if you’re prepared to dot your “I”s and cross your “T”s.