While a personal bankruptcy will remain on your credit report for seven to ten years and will make it more difficult to obtain credit, it is possible to get a small business loan after your bankruptcy.
To start, keep in mind that because the bankruptcy wiped out your unsecured debt and you cannot file for bankrupty again for a certain number of years, lenders may consider you to be less of a credit risk than you might think. However, you should anticipate having to shop around for loans, explaining what caused you to file bankruptcy, and demonstrating that your finances have changed and you are now a good credit risk.
Before you try to get credit for your business, make sure you have a solid, organized business plan to present to potential lenders. The industry in which you are seeking a loan might also make a difference as to your success. If you're seeking funds for a business with a high rate of failure, such as a restaurant, prepare solid responses to likely questions.
Bankruptcy provides you with a financial fresh start, so make sure to take advantage of that and avoid any pitfalls that contributed to your financial troubles before bankruptcy. You may increase your chances of getting a business loan if you can show the lender that you have kept your debt to a minimum after bankruptcy. Additionally, demonstrating financial responsibility may help convince your lender to offer you a loan. Be prepared with evidence, such as statements showing that you’ve consistently paid your mortgage or rent payments and car payments on time since the bankruptcy.
One of the most important factors a lender will consider is whether your income supports your ability to repay the loan you’re seeking. In order for a lender to approve your loan, you must have enough income to repay the loan and your income must be consistent and unlikely to be reduced.
You are allowed to attach a brief explanation to any item on your credit report. Therefore, if your financial troubles were caused by a major event, such as a divorce, car accident, or catastrophic illness or injury, you can place a short statement on your credit report explaining what happened. Lenders may consider this information when determining whether you are eligible for a loan.
It is also useful to create and print out a short statement explaining what caused the bankruptcy, to show the lender what created your financial hardship and demonstrate why your circumstances are different now. Make sure you keep this statement brief and leave out any emotion or negative statements. For example, don’t hand the lender a page about how awful your former spouse was because he or she failed to provide child support payments. Instead, make a simple statement about the facts and explain why the circumstances are different now.
Print out several copies of your statement and provide them to lenders with your application. Make sure you are prepared to articulate the highlights of the statement as well, in case you are asked about it.
All lenders have their own criteria by which they determine eligibility for loans, so your best bet is to find lenders that specialize in small business loans and ask them about their lending criteria. If you don’t have any luck, consider credit unions. Your local chamber of commerce may be able to suggest lenders that offer loans after bankruptcy.
Bear in mind that, because of your credit history, a lender will often charge you a higher interest rate and may require that you secure the loan with collateral, such as the equipment purchased with the loan funds or your own house or car. If you are still having trouble finding a lender, consider asking someone with a good credit history if he or she will cosign for you.