Can I get a business loan after bankruptcy?
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UPDATED: Feb 8, 2021
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Business owners can get approved for a business loan after bankruptcy but it depends heavily on several factors such as the level of risk, the type of business and the current lending conditions.
A personal bankruptcy filing will remain on a consumer’s credit report for seven years. This mark will create more tension for future borrowing opportunities, but it does not prevent a consumer from participating in the financing world.
A bankruptcy eliminates a consumer’s unsecured debt, meaning that any debt which lacks collateral does not have to be repaid. This includes credit card debt and personal loans. In order to prevent consumers from frequently filing and deleting their debt, there is a rule stating that bankruptcies cannot be refiled for eight years.
These limitations could allow for a lender to view the bankruptcy in a positive light, according to Lauren Rode, a bankruptcy partner at Consumer Action Law Group.
“These two items may actually put individuals who just completed a bankruptcy in a less riskier category for lenders,” she said.
Jim Albertson, president of small business lender Sunovis Financial, said that his organization does have underwriting sources that look at loan requests if they are past the two year mark. But he added that the list of accepting credit facilities is limited.
One of his credit facilities looks solely at the business history when deciding to approve or deny a new business loan. The credit score for the business, and not the borrower, is more important in the loan process.
“There is no personal guarantee from the business owner and we only look at the past three months’ business bank statements to determine revenue, cash flow, and average daily balance,” Albertson said.
Recently, a medical professional who filed a personal bankruptcy in 2009 was approved for a business loan with Sunovis Financial. The owner was able to prove that his business’ cash flow and business model were stable, which was enough for the alternative commercial lender.
Despite the possibilities, interested applicants should understand the limitations of the current business market.
One reason why potential borrowers face hardship is because exemplary business owners face difficulty getting approved for a loan. Banks and non-banks have tightened their lending standards, creating a difficult lending situation for business borrowers, according to Terry Robinson, CEO of Sunovis Financial.
“Even existing businesses with good cash flow can find it challenging when it comes to obtaining working capital,” he said.
Another item that influences a lender’s willingness to approve a loan is the type of business that needs funding. Startup businesses are already labeled as high-risk, so an owner with a bankruptcy stain on their credit report will likely be turned away from a loan. In comparison, an owner with a stable and established business with several months or years of positive financial transactions would be more appealing to a lender.
One instance where this is not the case is for venture capitalists. These investors, who can lend to businesses at will, are more interested in making a profit quickly. If they decide that a startup or a business is able to make money quickly, such as in the technology field, they might be open to approving a business loan. These cases are rare and depend entirely on the borrower’s ability to find a venture capitalist and explain their business plan.
Each lender is different and it is important to ask beforehand what requirements and documents are needed for a business loan. As a general guideline, a prospective borrower should have the following items ready when applying for a business loan post bankruptcy:
- An updated business plan
- Proof of consistent income
- An explanation of the bankruptcy filing
Despite these preparations, business owners that have lived through a bankruptcy should realize that until their seven year period is over, their chances of acquiring a business loan will be lower than exemplary consumers.
Lenders will not view post-bankruptcy consumers in the same fashion as those with high credit scores above 750.
“They should be prepared to shop around, have a prepared explanation for what caused the bankruptcy filing and be able to demonstrate that their finances have now changed for the better,” Rode said.
It will take considerable effort, but if a consumer wants to strengthen or start a business after a bankruptcy, it can be done.
“With the right guidance, proper explanations, strong finances since the bankruptcy, and seeking out a lender who tends to be more sympathetic … even those with tough credit predicaments will be able to secure loans,” she said.