Filing for bankruptcy might seem like the end of the world, but it doesn’t have to be. Many small business owners manage to bounce back and rebuild their dream with a bit of help.
However, that isn't to say that it will be easy (otherwise everyone would be doing it). The biggest challenge you will face by far will be to qualify for a small business loan. Bankruptcy leaves a big stain on your credit score, and depending on the type of bankruptcy, will stay on your records for 7 to 10 years. Declaring bankruptcy is not a decision one makes easily, but it might be the only chance of settling debts, which cannot be repaid.
In the end, filing for bankruptcy should be treated as any other business decision. Try to evaluate the situation objectively before making any hasty moves. Below you can read more about the different types of bankruptcy and some tips on improving your chances of receiving a small business loan.
Types of Bankruptcy
In the United States, there are three general chapters under which bankruptcy can be filed.
Chapter 7 bankruptcy, also known as "liquidation" or "straight bankruptcy," is the most common form of bankruptcy out of the three discussed here. In this case, the trustee, appointed by the court, receives the right to sell part of the debtor's assets in order to pay back the creditors.
In reality, a lot of business owners who file for Chapter 7 get to keep a big part of their property as a result of the “exemption” rule. How much you are allowed to keep will depend on the value of your assets and the specific regulations of your home state.
Chapter 11 code permits a reorganization of debt and assets. This means that the business stays alive and operations continue as usual. A plan to repay the creditors is then developed and has to be approved by the court.
Both businesses and individuals can file for bankruptcy under Chapter 13, which is also called a wage earner’s plan. Here, the debtor keeps all of his property and follows a strict repayment plan over the course of 3 to 5 years.
How to Improve Your Chances of Getting a Loan?
Small businesses that have filed for bankruptcy have great difficulties obtaining a traditional line of credit.
Although you cannot erase the bankruptcy from your record, there are some things you can do to improve your chances of getting approved for a business loan.
Repair Your Credit Score
Both your personal and business credit account will be under scrutiny after having filed for bankruptcy. To repair your credit score you will need to prove to potential creditors that you are still reliable and trustworthy. Play it safe and keep detailed records of all your bills, so you never miss a payment due to an oversight. Another tip is to get a secured credit card and make sure to avoid any outstanding bills.
Focus on Your Business Plan
Your business plan will be your main argument when applying for a loan. It will show the bank whether you can make sound financial decisions and set realistic goals. Prepare your document carefully and back up your ideas with as many figures and numbers as possible.
Find a Co-Signer
A business partner with a good credit score will definitely improve your chances of receiving a loan. But you have to decide whether you want to involve an outside person. Notice that both co-signers carry the same amount of risk and responsibility. Any delayed payments will affect both parties negatively.
Finally, you have to have patience. The more time has passed, the less your bankruptcy will affect your credibility. At first, it might be tempting to try and conceal your mistakes, but in the end, being upfront about your financial situation will build up more trust with potential partners and increase your chances of getting approval.
Alternatives to Traditional Funding
Even after the record of the bankruptcy is removed, banks will still prefer bigger and more lucrative business lending, and small businesses will often have to rely on alternative sources of financing. Thankfully, there are a lot of options for small businesses financing these days.
Startups and small businesses can take advantage of the widespread offerings of online lenders. Technology has made it possible for online lenders to offer quick and easy access to capital and a wide variety of short- and long-term small business loans.
Merchant Cash Advance
Cash advances are short-term loans with higher than average interest rates. In most cases, you should expect an additional fee, either a flat rate or a percentage of the loan amount. This option is more expensive, but if you are short of cash and strained for time, you might want to consider it.
As the name implies, Peer-to-Peer Lending (P2P) involves direct borrowing from an individual without any financial institution acting as an intermediary. Online platforms like LendingClub.com bring borrowers and potential lenders together. The lenders will review the borrower's profile and decide whether to approve it themselves. The interest rates will, of course, be higher than with traditional loans, but there is a higher chance of lenders sympathizing with your case.
Finally, be on the lookout for lenders who specialize in bad credit loans. However, make sure to read the fine print as these lenders don't have the best reputation for transparency.
Maria Boradjieva is a Communication Assistant at Market Inspector UK, a digital marketplace for businesses in Europe that offers free quotes from B2B suppliers.