Many of the owners we talk to at Delancey Street have a bankruptcy somewhere behind them, and plenty assume the door to credit has closed for good. It’s as if, once the bankruptcy is over, your reputation is damaged so severely that no one will ever extend you credit again. That doesn’t mean that there are no other options. Navigating business financing after a bankruptcy can be challenging but it’s certainly not impossible. It takes dedication, effort and a sound strategy, but the impact of a bankruptcy can be overcome with responsible credit practices.
Start with the reality. A Chapter 7 bankruptcy stays on your credit history for ten years, and a Chapter 13 filing stays for seven. Additionally, your credit score will likely be reduced by a lot, typically somewhere between 130 and 240 points, depending on where your score started. This will make it difficult to borrow money from commercial lenders, and you may need to explore other options to get the funding you need. Still, just because you filed for bankruptcy doesn’t mean your credit history will never get better. Here are five ways to get back to a yes.
Personal Credit
The first way back is to rebuild your personal credit. Because the bankruptcy is on your report, you’ll need to work extra hard to show creditors that you’re a responsible consumer. You want to open a secured credit card because it gives you a controlled way to rebuild credit. It works by requiring a deposit that becomes your credit limit, allowing you to demonstrate responsible spending and timely payments. This builds your credit gradually and establishes a good payment history. Pay all your other bills on time, too. Paying every bill promptly is the most effective way to recover from a bankruptcy. While the bankruptcy stays on your credit report, keep making payments on time so that your credit score improves incrementally. This pattern of consistency tells lenders you’re serious about financial responsibility.
Keep your revolving credit debt as low as you can; below 20% is recommended. Lenders will review your personal credit report. Beyond that, lenders also look at your recent credit history to make sure you’re not taking on more debt than you can handle. Put simply, if you use a high percentage of your credit, it shows you may be financially unstable.
Look Beyond the Bank
The second is to look beyond the bank. And that’s where alternative lenders might be able to fill the void. They may offer term loans and lines of credit, but they carry higher interest rates and fees. Be aware of how much the loans will cost you and whether you can easily afford those expenses. The benefits of the loan have to outweigh the cost. With an asset-based loan, you might have the chance to tap into some of your company’s existing assets, providing an extra source of financing. Crowdfunding is another possibility, though it takes an intensive marketing campaign, and it only really works if you have a loyal customer base who already love and trust your brand. You need to market your business so that your customers are actually interested in funding you. If you’ve never run a crowdfunding campaign, be wary.
Third, you can bring in a cosigner. Some lenders permit a loan after bankruptcy with a qualified cosigner. Here’s why you need to think twice before asking for a cosigner. A cosigner is someone who agrees to be responsible for your loan if you don’t pay. Yes, there are risks, and they’re serious ones. The person you ask to cosign your loan is also taking a risk. And if you default on the loan, they’re even more at risk. If you make every payment on time, their own credit score gets no boost from it. And then one day, you’re late or you miss a payment, and so now they take the brunt of it.
Fourth, show up prepared. When you ask a lender for a loan, the more prepared and detailed you are about your plans, the more likely they will trust you and be inclined to make the loan. Give thought to how you will use any funds and include a detailed proposal in your business plan. Then deal with the bankruptcy directly. Build a timeline, backed by factual documents. Lay out your reasons for filing, or why it occurred. Establish a narrative before the lenders ask you. Often it came down to a sudden life change, or an unexpected disaster, a one-time event such as a divorce or a medical emergency that isn’t expected to happen again. Make sure you know how to articulate it in a succinct manner and that you have documentation to back up your statements.
The fifth option is friends and family. It’s common for friends and family to help get a small business up and running or to offer an important cash injection to get them over a hurdle. The Federal Reserve Bank’s 2020 Small Business Credit Study found that 56% of business owners relied on friends or family and personal funds to finance their business between 2015 and 2020. The only real way to maintain the balance of money and friendships is to settle on fair terms that are fair to everyone and to be thankful for any help that you receive.
Sometimes it’s simply a waiting game. Small business owners should stay focused on their goals and be patient. Meanwhile, keep saving money, build your credit and get more experience in your field. That way you’re ready when lenders are. A bankruptcy can feel like a crushing blow, but the good news is that it’s not the end of your credit story.
Stabilizing Your Finances Before Taking on More Debt
And if the debt from your current business is what’s keeping you up at night, start there. If you’re struggling with payments, you should focus on stabilizing your finances before taking on more debt. If you’re struggling to make payments on your MCA, you may want to pause and evaluate your options. At Delancey Street, our senior advisors negotiate with merchant cash advance funders and lenders for less than the full balance owed; we don’t sell you another loan. The first consultation is free and confidential, and if bankruptcy counsel is the better path for you, we’ll tell you on the first call.
