Business Loans with Bankruptcy
After declaring bankruptcy, you have probably worked to get your life back on track. Straightening out past business mistakes, or opening a new business after a failed venture, is not uncommon. But all businesses will, at some point, need capital. The question becomes, how to obtain it with a bankruptcy on your record?
Unfortunately, small businesses comprise 80-90% of business bankruptcy filings. If you’re a small business owner, you might have owned a previous business which failed through no fault of your own. Many people go into business without having the required financial skills and learn the hard way how to manage money. Or you had personal problems, such as an illness or divorce, which interfered with running your business.
Whatever the reason that you previously had to declare bankruptcy, you’ve picked yourself back up and revived or started a new business. And now you’ve reached the point where you need capital. While your business funding options will be more limited after bankruptcy, you are not without resources. Shield Funding understands that bankruptcies occur but that should not restrict you from ever receiving a business loan again. Get started by applying online today. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What are Business Loans after Bankruptcy?
Lenders make their money by charging interest and fees on the capital that they lend. If you do not repay your loan, they lose both their capital and their profit. Because getting repaid is important to them, they carefully analyze risk when deciding to lend.
A past bankruptcy, even if it is no longer on your credit report, is a high-risk factor to many lenders. Therefore, if they will lend to you, they try to cover this extra risk. If you are seeking capital after a bankruptcy, you can expect the following;
- Higher interest rates
- More fees
- Additional verification requirements
- Shorter repayment periods
There will be variations among lenders and what they charge, but overall your cost of capital after a bankruptcy will be higher. That does not, however, mean that you cannot access capital or that lenders will overburden you with ridiculous fees, interest and repayment terms. Remember, they want to be repaid and they will only lend you the amount they think your business can reasonably cover, with terms that support your continued operations.
Do Banks Offer Business Loans with Bankruptcy?
Simply put, “no.” Due to their more stringent lending requirements, banks request significant documentation and require excellent credit from applicants. To even qualify for a bank loan you must have;
- A credit score above 650.
- Been in business longer than two years.
- Strong cash flows annually.
Even if you had perfect credit prior to filing for bankruptcy, credit bureaus have indicated that they deduct anywhere between 130-200 points after bankruptcy. Even an almost-perfect score of 800 would be at 600 at that point, too low to qualify for a bank loan.
Someone who has been in the financial difficulties that lead to bankruptcy likely doesn’t have a perfect score to begin with, and it can take seven to ten years for it to roll off your credit report. It will take many years before a traditional bank will lend to you, which is why alternative lenders and others have entered the lending market. They help deserving business owners obtain capital even after past mistakes.
Types of Business Loans after a Bankruptcy
A loan taken out after bankruptcy is unlikely to take the form of a fixed-rate, term loan, but rather will be an alternative form of capital. Funding decisions could be based on credit card sales, monthly revenues, or past due receivables. Here are four types of loans available to business owners after a bankruptcy.
Bad Credit Business Loans
After a bankruptcy, a bad credit business loan is likely the right loan product for you. Offered by alternative lenders who specialize in lending to customers that banks reject, they do not treat your credit score and past bankruptcy as an insurmountable barrier.
Alternative lenders will look at your credit score, and do not lend below a score of 500, but they consider your score within the context of your current business. If you have sufficient monthly revenues of $8,000 and above your odds are quite good that you will be approved. While they might request tax returns and bank statements for higher value loans, sometimes revenues and proof of your identity are enough to get approved.
Expect to pay higher interest rates for a bad credit business loan. After all, the lender is taking a higher risk when lending to you and the interest rate is part of how they protect themselves from that risk. Alternative lenders’ bad credit business loans interest rates or fees go anywhere from 12% to 45%, but are still much less than other funding avenues.
Alternative lenders who offer these loans have different requirements than banks. They are an accessible funding source for a business owner who needs a loan after bankruptcy.
Short Term Business Loans from Alternative Lenders
A term loan is repaid over a fixed period of time, and if it is also a fixed-rate loan your monthly payment does not fluctuate. A short term business loan through an alternative lender will have a repayment period that ranges from two months to one and a half years, a shorter time than term loans offered by banks.
Business loans through alternative lenders can get approved within 24 hours, and you could receive funding within a few days. Loans are approved on the basis of annual revenues and other factors, so if your credit score is above 500 your bankruptcy will not hurt your approval chances.
Lenders want to be repaid over a shorter time period because it minimizes their risk of non-payment. Because the amount of capital and interest you are repaying is spread over a shorter time period, your payments will be higher than those on a term loan.
Alternative lenders also offer flexible repayment plans for their business loans, though they generally require payments through automatic bank deductions. During the application process, they will determine if they want to receive payments monthly, bi-weekly, weekly, or even daily.
Merchant Cash Advances
A merchant cash advance is a form of lending that advances money on the basis of projected future sales. Advances are funded within a short period of time, without a huge loan application, and without checking your credit. Your past bankruptcy will not be an issue; all the lender is concerned with is the amount of your current cash receipts.
To determine how large of an advance they will lend, a lender analyzes several months of credit and debit card transactions and calculates an average. Your only application could be supplying them with your business name, address, and some bank statements.
You repay the advance every time you swipe a credit card in the future. The lender deducts a percentage of each future sale. That percentage includes both the capital they lent to you and their profit. While rates can start at 15%, they frequently rise to triple digits. A merchant cash advance may be an easy business loan to obtain after a bankruptcy, but it is not a cheap one.
If your business processes a high volume of credit card sales, such as salons, restaurants, grocery stores, and more, this could be a good choice to fill your capital needs. If your customers pay in less frequently and through other methods, it is not a good choice.
Invoice Financing and Factoring
If you have a large balance of past due receivables, look into invoice financing and factoring. Accounts receivable (“A/R”) financing lenders extend credit on these past due receivables. This financing can help you smooth over bumps in cash flow.
With invoice financing, you pledge the value of your past due receivables to the lender. Your personal credit and bankruptcy is not a factor, though the lender may check your customers’ credit. An invoice factoring company buys the invoices outright, at a discount, and collects on the past due balances. You have no further involvement with them.
Be careful when choosing which company to pledge or sell your receivables to, as if they are aggressive in collecting they could hurt long-term customer relationships.
When they advance funds, an invoice financing lender also holds back a reserve. It protects them from customers who will never pay. The amount advanced on the invoices’ remaining value could be 80-85% of its total or much less.
How to Find the Best Business Loan after Bankruptcy
Poor financial management or lack of knowledge likely contributed to your bankruptcy. Do not make the same mistake twice, research and compare potential lenders before trusting your business’ future to them.
An Internet search will yield many options, or you can ask other businesses in your area where they have gone to meet their capital needs. Make a list of potential lenders and compare the different rates, fees, and terms they each offer. Pick up the phone and talk to a few of them to obtain quotes. Not all high-risk lenders will offer you the same terms; with comparison shopping you might find a better deal.
When you do decide to borrow, it’s best to work with an experienced lender. An experienced lender knows how to service loans and will not approve you for an amount you cannot repay. If you are feeling insecure about your financial know how after bankruptcy, this can be reassuring.
If a lender has been in business for a while, such as Shield Funding which has been operating for more than ten years, it is proof that they have satisfied customers, know how to meet the market’s needs, and can lend successfully.
Improving the Odds of Being Approved
After you have found a lender who works with borrowers after bankruptcy, here are a few tips to improve your application.
Wait to Apply for a Business Loan after Bankruptcy
If your bankruptcy is close to rolling off your credit score, do your best to wait to apply for a business loan. Try to cut expenses or borrow money from friends and family to see you through.
Rather than borrowing to purchase needed equipment, outsource a big order, or borrow or sub-lease from another manufacturer. Talk to a customer about shifting their production timeline. If you can, find creative ways to delay whatever project or business need you have that is leading you to apply for a loan.
As well, if you are close to the two-year mark of being in business it could lower the fees you will pay on a bad credit business loan. At two years, lenders view your business as being more stable and risk worthy. Unless you absolutely need the capital now and have no other options, wait to apply.
Fees and interest rates reflect a lender’s risk and profit. If they question your repayment ability, as reflected by a past bankruptcy, they will charge you more. If you want to pay less for capital, get further out from your bankruptcy and demonstrate successful operations for a longer time.
Increase your Marketing Efforts
Increased revenues also help you qualify for a business loan from an alternative lender, as they base their lending decision in part on monthly revenues. Try putting more effort into marketing, particularly free methods. Advertise on social media, ask friends and families to write positive reviews of your business, service, or product, and invest a little cash in reaching out to potential new customers. Effective marketing leads to higher revenue, which in turns leads to an easier approval for a bad credit business loan.
Work on Your Credit Score
Time will remove your bankruptcy from your credit score, but while you are waiting there are things you can do to improve it in other ways. While not all lenders check your credit score, but a higher score will not hurt if they do.
Late and missed payments ding your score, so set up auto-pay for all your bills. If it is the first time you were late or missed a payment, call the creditor and ask them to not report it to the credit bureaus.
Underwriters look at your debt service ratio, i.e., the amount of your net income used to service debt, when making a lending decision. It also impacts your credit score. An easy way to bump your score higher is to pay down balances on revolving lines of credit, like credit cards.
Read our bad credit repair guide if you’re interested in learning more about how you can repair your credit after bankruptcy.
The Final Word on Business Loans after Bankruptcy
Many business owners who failed at their first attempt have gone on to great success. Never forget, Apple fired Steve Jobs. A past bankruptcy should not prevent a business owner who is currently doing well from accessing capital.
While you will pay more in interest and fees for capital after a bankruptcy, often you can pay it off early if there are no prepayment penalties. Your true cost of capital could be much lower than anticipated.
Alternative lenders fill the gaps left by traditional lenders, who refuse to work with someone who has a bankruptcy still on their credit report. An alternative lender will help you find a small business loan that meets your needs.