Credit card, lease, and business loan bills can pile up quickly when sales and cash flow slow down, and sooner or later, it gets impossible to keep up, so you either have to declare bankruptcy or negotiate settlements with your creditors. At Delancey Street we negotiate business debt with funders and lenders, and the truth is, just as marriage sometimes doesn’t work, a business sometimes doesn’t survive, and filing for bankruptcy might be the best thing a business owner can do. When that is the case, we say so and point the owner to bankruptcy counsel. Still, it may be too easy - and too enticing - to file, only to face a rude awakening if you can’t get back on your feet. Once you’re back on your feet, how will you rebuild, maintain, and fund your business if you don’t have access to capital? Can you get credit cards, a line of credit, or business loans?
You can, and the right advice and preparation can keep it from being a career-ending event. Aparna Mathur, in research for the U.S. Small Business Administration, found that many small businesses that file for bankruptcy recover within seven years. The years in between can be tough. Here are five things that get harder.
The first is borrowing money. To put it bluntly, lenders consider bankruptcy to be like a large neon sign that flashes the message “bad credit risk.” It’s often hard for a small business to get a bank loan, and it’s even harder if it has a bad credit history. Aparna Mathur found that businesses that had filed bankruptcy are 12 times more likely to be denied a small business loan. Her research also found that they should expect to pay between 1 and 1.6 percent higher interest rates than they otherwise would. In other words, you can forget about easy credit and low rates. If a bank says no, don’t take the rejection personally. Take it as a business decision. A turndown doesn’t have to be an insurmountable obstacle. Look at a secured credit card, a short-term loan, peer-to-peer lending or an SBA-backed microloan. These alternatives may have limitations, and they will probably be more costly than a traditional term loan. But they can be very helpful if you’re trying to get back on your feet in the years directly after the filing.
The second is working with suppliers. When a vendor checks your credit and sees the bankruptcy, they may feel anxious about the ability to meet the demands of your agreement with them. Even so, for the first several months after bankruptcy, you’ll likely have an easier time with suppliers than with bank lenders. And if your relationship with former vendors was good, you could ask them to work with you. If you are starting from scratch, start small. A fellow small business owner is more likely to take you on than a large, national company. Use that small vendor to build a credit record before moving on to other vendors. Your contracts with these vendors may require an extra deposit, or to pay in advance. However, this is normal when you have a shaky credit rating, and the requirements may fade as your business recovers. You shouldn’t be offended by your vendors asking for these conditions. The more time passes since you filed, and the more good payment history you build, the better your story is.
The third is rebuilding your credit. Get your vendors to report your payments to Dun & Bradstreet, the major business credit bureau. Their positive reports will gradually help rebuild your credit and help you get financing. If you went through bankruptcy personally, check your credit reports from the three main credit bureaus - TransUnion, Equifax and Experian - and make sure the information they have about you is accurate. Factual accuracy is more important than putting a good spin on things. And nobody else is going to fix the errors for you. The Fair Credit Reporting Act says a bankruptcy can stay on your credit report for as long as ten years, but personal bankruptcies are often cleared after seven.
The fourth is your margin for error. Every new line of credit, vendor contract, and business loan represents a second chance from someone who knows about the bankruptcy and is willing to trust you anyway. Consider that every vendor or lender who chooses to do business with you after a bankruptcy is taking a leap of faith, and keep your end of the bargain. How can you convince them you are worth their trust? The best way is to work with them in a way that proves it. Whether you are still paying old debts or working with new creditors, pay all bills on time, every time. In full, too. Create a standard accounts payable process and regularly check cash flow statements so that nothing falls through the cracks. Like your credit score, your reputation is yours to rebuild, so own up to past mistakes while keeping your eyes on the future.
The fifth is running the business itself, and that depends on the chapter you filed. Every bankruptcy is different. If your business filed under Chapter 7, it no longer exists. You’re starting over from scratch, which raises the question: how will past failure affect the future? There is no guarantee that a new chapter will be any better than the old one, but there is a good chance that it can be. Under Chapter 11, the business typically keeps operating, but you have to work with a trustee to avoid a financial bloodbath, which is generally the most complex and expensive type of bankruptcy. The company’s future will depend heavily on the direction that trustee takes. Chapter 13 is for sole proprietors who are filing personal bankruptcy too, and it’s a good option for many proprietors who have combined their finances, because it can help them keep their personal assets.
As for your credit report, seven to ten years may sound like a long time, but it really isn’t. Keep all your business records very clean, pay all your bills on time, and stay in business, and the time will come where your credit will be clean again, and creditors will care less and less about the past.
Back in Business
If you are weighing bankruptcy against settling with your funders and lenders, the point of all this is not to scare you. It’s to open your eyes, and to make it clear that if you do file, you are still able to get back on your feet and back in business. So if that is the better choice for you and your business, don’t let the prospect of rebuilding, and of damage to your credit, hold you back. Bankruptcy might be the best possible choice, depending on your business plan and where your obligations are. There may be a better path to consider. A first consultation with Delancey Street is free and confidential.
