Small Business Loan after Bankruptcy Filings and Alternative Funding Sources
Securing a business loan after bankruptcy is not easy but achievable. This article will help you understand the impact of bankruptcy, how to rebuild your credit, and explore different loan options. Learn the steps to improve your chances for a business loan after bankruptcy.
Cash Flow financing is available as an alternative to a small business loan. For example, if the bankruptcy filing is still open, invoice factoring for post-discharge or a Debtor in Possession or DIP factoring facility. Invoice factoring is based on your credit-worthy B2B or B2G customers.
Key Takeaways
- Understanding the impact of bankruptcy on credit scores and small business loan eligibility is essential for securing funding after bankruptcy.
- Rebuilding credit during the loan waiting period is crucial; strategies include checking credit reports, making timely payments, and maintaining low debt levels.
- A well-prepared bankruptcy statement and a solid business plan can enhance a borrower’s chances of loan approval, demonstrating financial responsibility and future stability to lenders.
Please read how to use invoice factoring after a bank turndown.
Understanding Bankruptcy and Its Impact on Business Loans
Bankruptcy is a legal status for individuals or entities unable to repay their debts. It significantly decreases a businessโs creditworthiness and makes it difficult to get loans. Lenders consider past business bankruptcy in their loan decisions. If individuals or entities choose to file bankruptcy or pursue personal bankruptcy, past bankruptcies can adversely affect loan eligibility and terms.
Recognizing how bankruptcy affects your finances is crucial for securing a loan afterward.
Types of Bankruptcy
Bankruptcy takes various forms, each with distinct consequences for businesses. The most prevalent types are Chapter 7, Chapter 11, and Chapter 13.
Referred to as liquidation bankruptcy, Chapter 7 may require the sale of a businessโs non-exempt assets, which could lead to the discontinuation of its operations. On the other hand, Chapter 11 permits companies to restructure their debts and establish manageable payment arrangements that can aid in recovery and possibly help them regain profitability.
For individuals such as self-employed persons who might need financial restructuring options like those available for larger entities like corporations or partnerships, there is also an option under federal law known as Chapter thirteen (aka โwage earnersโ planโ). This avenue allows them to produce viable repayment plans and often culminates with any remaining debt being dismissed once they fulfill these structured payments.
Credit Report and Credit Scores
Filing for bankruptcy can reduce up to 240 points in credit scores right after the bankruptcy is filed. The presence of a bankruptcy filing on your credit report can last between 7 and 10 years, which may hinder your ability to qualify for loans down the line. This significant duration highlights the importance of carefully planning how to reconstruct your credit and prepare for future loan requests.
However, invoice factoring can be used even with a 525 personal credit score.
When Can You Apply for a Business Loan After Bankruptcy?
Usually, time frames must pass before you can seek a business loan following bankruptcy. The standard expectation among most lenders is for three to seven years to elapse post-bankruptcy before entertaining your loan request. There could be minor differences in these durations depending on the lender.
Concentrating on restoring your credit during these waiting periods will enhance the prospects of your subsequent loan applications.
If your bankruptcy has been discharged, invoice factoring is a solid B2B financing choice compared to the waiting period for a small business loan.
Application Waiting Periods for Different Lenders
The time frame in which various lenders will entertain loan applications following a bankruptcy declaration can differ, with some requiring as long as seven years before they consider issuing certain kinds of loans.
It is essential for businesses that have declared bankruptcy and are seeking financing to thoroughly investigate financial institutions known for extending credit to companies with a history of bankruptcy. Securing a cosigner might enhance the likelihood of obtaining loans that could be unattainable due to the businessโs past insolvency issues.
Rebuilding Credit During the Waiting Period
Rebuilding your credit post-bankruptcy is vital for qualifying for a business loan. Improving your credit can significantly enhance your chances of securing a loan. The first step is to check your credit report regularly. This will help you identify any inaccuracies. Consider using a secured credit card, making small purchases, and paying off the balance in full each month.
Build credit through small installment loans to diversify credit types and avoid late payments and defaults. Some lenders may consider a loan application within 2-3 years if credit is rebuilt. Multiple bankruptcies may disqualify an applicant from getting a loan. During the waiting period, save money and gain relevant experience to improve your business prospects.
Preparing to Apply for a Business Loan Post-Bankruptcy
Proper preparation and a detailed bankruptcy statement are essential when applying for a loan post-bankruptcy. Lenders appreciate a clear outline of recovery efforts and future financial strategies. Include a timeline of events leading to bankruptcy to give context.
A well-prepared bankruptcy statement is essential for communicating your financial recovery to potential lenders.
Creating a Solid Business Plan
When applying for a loan post-bankruptcy, it is vital to have a well-structured and robust business plan that meticulously addresses apprehensions. It is critical to craft an articulate proposal showcasing the strategies for generating income, managing costs, identifying potential risks, and demonstrating how they will be mitigated when seeking credit following bankruptcy.
Your detailed business plan should incorporate a chronological framework and documentation elucidating the factors contributing to the previous financial distress to increase your credibility with lenders after declaring bankruptcy. This will reassure lenders of future fiscal stability.
The likelihood of obtaining a post-bankruptcy loan depends on the industry type. Thus, if youโre venturing into high-risk fields, being equipped with solid justifications in response to predictable inquiries from potential financiers is essential.
Demonstrating Consistent Income
Exhibiting a steady income stream is crucial for acquiring loans after bankruptcy, as it shows your capacity to fulfill your repayment obligations. Lenders are keen on observing dependable cash flow that can comfortably meet the demands of loan installments and other financial commitments. Historical fiscal reports and tax documentation can assist in illustrating your monetary stability. Demonstrating punctuality in settling mortgage, rent, and vehicle finance payments indicates financial responsibility to those providing credit.
Conversely, businesses may encounter difficulties showing consistent revenue due to their economic struggles, leading to declaring bankruptcy. These entities must focus on augmenting their incomes and forging robust cash flows post-bankruptcy with an aim at better prospects when applying for financing options. Establishing a stable earnings pattern alongside accumulating savings following bankruptcy will boost your credibility with prospective lenders looking into extending credit facilities.
Minimizing Debt
Maintaining minimal debt levels during the interim period can enhance your probability of obtaining a loan post-bankruptcy. By keeping your debt in check, you not only elevate your credit rating but also improve your debt-to-income ratio, thus presenting yourself as a more appealing prospect to lenders.
To preserve low debt after declaring bankruptcy, adopt financial management strategies such as creating and adhering to a budget, exercising judicious spending habits, evading superfluous debts, satisfying outstanding liabilities promptly, consolidating existing debts where feasible, and engaging in discussions with creditors. Keeping revolving credit balances notably under 20% demonstrates fiscal prudence to potential lenders when applying for a loan following bankruptcy.
The importance of curbing indebtedness following bankruptcy cannot be overstated if one wishes to prevent falling back into insolvency while simultaneously nurturing an advantageous credit score.
Exploring Alternative Financing Options
Numerous financing alternatives exist for small businesses, including those that have experienced bankruptcy. Small business owners can explore various solutions such as invoice factoring, merchant cash advances, asset-based lending, and specifically tailored small business loans. Compared to traditional banks, alternative lenders typically provide more accommodating terms to businesses with a history of bankruptcy.
Business owners must be well-informed about the different funding options available after facing bankruptcy and engage with an appropriate lender to obtain the necessary financial support for their enterprise.
Invoice Factoring
Invoice factoring allows businesses to convert their unpaid invoices or open accounts receivable into immediate cash by selling them to a factoring company for a cash advance. It is a form of permanent working capital. One significant benefit of account receivable factoring is that it allows businesses to receive some money immediately by selling invoices for goods and services.
Payroll factoring helps businesses by providing access to cash flow by purchasing accounts receivable, allowing them to meet payroll obligations. Invoice factoring offers a quick turnaround of same-day funding, which helps businesses cover payroll costs without waiting for customer payments.
One advantage of invoice factoring over traditional loans is that it requires no collateral since you sell your accounts receivable. Non-recourse factoring protects businesses from bad debt by absorbing the loss if a customer cannot pay their invoice, thus taking on the credit risk.
Businesses can expect to receive funding within 3 to 5 days of their factoring application. Bankers Factoring assesses credit based on the customerโs credit scores, not the business ownerโs credit score, making it more accessible. After going through the approval process, you can receive same-day funding, which aids in cash flow.
Through Bankers Factoring, businesses can receive up to a 93% cash advance on unpaid invoices. Payroll financing occurs when a business sells its unpaid accounts receivables to a factoring company in exchange for cash funding.
Merchant Cash Advances
A merchant cash advance (MCA) offers immediate funds in return for a share of future cash and credit card revenues. The repayment process divides the daily credit card sales between the provider and the merchant. However, MCAs can be expensive, so make sure you have the gross profit margins to cover the cost of a merchant cash advance.
Asset-Based Financing
Asset-based financing provides funding for businesses by using a businessโs assets as security. Financing options that leverage accounts receivable take advantage of unpaid invoices to secure financial backing. For companies emerging from bankruptcy, this type of financing using real estate or inventory can be an effective strategy.
Financing based on accounts receivable entails using the outstanding debts owed to a company as collateral to obtain loans.
Can You Get an SBA Loan After Bankruptcy?
Obtaining an SBA loan after bankruptcy is possible but requires navigating lender reservations regarding risk. The SBA does not exclude businesses based on bankruptcy, which means you can still apply for SBA loans: strong business financials and time since the bankruptcy filing can improve loan approval odds.
While qualifying for a business loan after bankruptcy is possible, it can be challenging. Banker Factoring can work with SBA lenders on a subordinate agreement to fund your accounts receivable.
SBA Loan Requirements
Small Business Administration (SBA) loans require that applicants have had no bankruptcies or foreclosures in the past three years and no more than two total bankruptcies. The minimum personal credit score required for SBA loans is typically 600 or higher. SBA lenders require collateral for business loans. Personal credit scores down to 525 are OK for invoice financing.
Liens from SBA loans remain intact after bankruptcy; lenders can recover their property through foreclosure or repossession. If a voluntary guaranteed SBA loan is involved in a Chapter 7 bankruptcy, the lender can repossess the property after the case ends.
Finding SBA Lenders
Engaging with small business associations can lead to valuable connections with lenders willing to consider loan applicants with a history of bankruptcy. These organizations frequently have established relationships with sympathetic SBA lenders, and leveraging these networks can significantly improve the likelihood of obtaining an SBA loan for businesses that have undergone bankruptcy.
Businesses seeking recovery and growth after bankruptcy must find SBA lenders open to working with them despite their financial past. Securing such lending partners is crucial for moving forward.
The Role of a Cosigner in Securing a Loan
Securing a loan post-bankruptcy can be more feasible with the support of a cosigner possessing a solid credit history. Such an individual’s involvement is paramount, diminishing the lender’s perceived risk and potentially leading to improved loan terms while increasing approval likelihood.
Itโs recommended that individuals seeking loans after declaring bankruptcy seek out lenders adept at handling applications under these circumstances, as this might lessen some risks of engaging a cosigner. Picking an appropriate cosigner becomes critical since their fiscal stability and credit standing directly impact the outcome of your credit application.
How a Cosigner Helps
A cosigner with an excellent credit history can enhance the likelihood of securing a business loan post-bankruptcy. This partnership may result in more favorable loan terms, including reduced interest rates.
Choosing the Right Cosigner
A cosigner must possess robust credit and be prepared to assume financial responsibility. The health of their finances and their ability to secure credit significantly affect the outcome of your loan application.
Writing a Bankruptcy Statement
Within your bankruptcy statement, it is essential to recognize the occurrence of bankruptcy and delineate the measures implemented to avert its future recurrence. Crafting such a statement aims to offer potential lenders an accurate and transparent portrayal of your current financial status.
Key Elements of a Bankruptcy Statement
In your statement regarding bankruptcy, detail the reasons that precipitated the filing for bankruptcy and highlight any changes in circumstances since that time. Your narrative should briefly describe the situations that caused financial difficulties.
For your explanation of bankruptcy intended for lenders, refrain from incorporating emotional phrasing and pessimistic commentary. It is essential to produce multiple copies of this statement about your bankruptcy to accompany each application you submit for a loan.
Presenting Your Case to Lenders
It is essential to maintain transparency with lenders by openly discussing any past errors and outlining your prospective strategies. Emphasizing the actions you have implemented for financial rehabilitation and detailing your recovery plan is key when conversing about your bankruptcy.
When conveying information about your bankruptcy, employing clear, direct language that sticks to the facts is essential. This approach minimizes confusion and bolsters trustworthiness with lenders, ensuring that emotion does not overshadow factual details that can reinforce your position’s validity.
Summary
Obtaining a loan for a small business following bankruptcy can be difficult, yet it remains within the realm of possibility. Small business owners seeking to secure funding must acknowledge the repercussions of bankruptcy and strategically time their applications.
To enhance prospects for approval, one should focus on rebuilding creditworthiness, crafting an impressive business plan, proving steady income streams, decreasing outstanding debts, considering non-traditional financing avenues such as SBA loans, and enlisting the help of a cosigner.
Remember that your financial past is simply part of your historyโnot its entirety. With dedicated effort and careful planning, you can turn a new leaf in securing capital for your enterprise despite previous fiscal setbacks.
Frequently Asked Questions
How long must I wait before applying for a business loan after bankruptcy?
You must usually wait three to seven years after bankruptcy before applying for a business loan. This timeframe allows lenders to assess your financial recovery.
Can I get an SBA loan after declaring bankruptcy?
After declaring bankruptcy, you can obtain an SBA business loan, but it may be challenging. It will depend on your businessโs financial standing and the time after the bankruptcy filing.
What are some alternative financing options available post-bankruptcy?
Post-bankruptcy, you can explore alternative financing options such as invoice factoring, merchant cash advances, and asset-based financing. These avenues can provide the necessary capital while working to rebuild your financial standing immediately post-bankruptcy or as DIP financing.
How can a cosigner help in securing a business loan after bankruptcy?
A cosigner with a robust credit history can improve your prospects of obtaining a business loan following bankruptcy. This is because it lowers the risk for the lender, which could result in better terms for the loan, such as reduced interest rates.
What should be included in a bankruptcy statement?
A bankruptcy statement needs to outline the reasons that necessitated the filing for bankruptcy, provide updates on any changes in circumstances since that time, and deliver a detailed examination of your economic difficulties.
Adopting this thorough method guarantees clarity and transparency regarding your financial status when applying for a business loan after bankruptcy or invoice factoring.