How Difficult is it to Get a Small Business Loan after a Bankruptcy?

Getting a business loan after bankruptcy will be nearly impossible for most borrowers. Lenders see bankruptcy as the primary sign that a borrower is not credit worthy, and they do not want to take the risk of issuing a loan to that type of person. This is especially true with a business loan lender that will be extending a fairly high amount of funding in most situations. To overcome this problem, there are a few avenues to consider.

Separate Business and Personal Credit

The most important step to retaining financial security when taking a business loan is separating your personal finances from the business. If you are starting a new business, you will need to use your name and credit score to secure the initial round of funding. However, once a business has been established, the business itself can take a loan since it is a legal entity. You do not need to worry about your personal credit impeding your ability to get a small business loan if the business is in healthy financial standing and not affected by your personal situation. If this is not the case, take care to set this up in the future.

Use Assets as Collateral

Secured loans are preferable for borrowers who have a bad credit history, but you should be careful when pursuing this option. You may consider using your home equity or personal assets as collateral. This is highly risky due to the reasons mentioned above. You are holding yourself responsible for any financial problem the business may have in the future. Further, you may no longer have assets due to the bankruptcy you just went through. If this is the case, then a secured loan will not work for you.

Seek Investors and Mezzanine Lenders

A better way to get the asset base you need for collateral is to find investors. Some investors will not care about your credit if your business plan has a high likelihood for success. One way to do this is to find mezzanine lenders. These are independent financiers who are willing to invest in your business for a share of the equity. They will not expect you to repay the debt, and they will often engage in riskier loans than standard, primary lenders. Mezzanine lenders often ask for some influence over the business in exchange. You may not like this idea, but you may find the lenders are actually experts in the field with good advice to offer.

Start Small

Ultimately, when you are recovering from bankruptcy of any type, you need to start small. Seeking a $500,000 loan to start your business will likely result in rejection. You may, however, seek a $10,000 loan to build your website. Once the business has moderate success in this way, you can seek an additional $30,000 to rent an office space. Starting small and working your way up to more permanent financing solutions will help build your credit. It will also provide you with financial statements to show future borrowers so you can prove the viability of your business plan.

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