After a bankruptcy, you have worked to put your life, or the life of your business, back on track. Maybe you are fixing the mistakes you made in an old business. Or, maybe you are opening a new business after your first one failed. Every business eventually needs to ask for capital. You just have to figure out how to do it with a bankruptcy on your record. You’re not alone if you’ve been through bankruptcy.
Small businesses account for 80-90% of business bankruptcy filings. Maybe your last business ended in failure through no fault of yours. Maybe you started a business without the skills you needed and learned money management the hard way. Or maybe personal issues got in the way, like an illness or divorce. The good news is that a bankruptcy on your record is not the end of the road for financing, though it will cost you more.
Alternative Lenders
After a bankruptcy, the product that likely fits is a bad credit business loan, offered by alternative lenders who specialize in the customers banks turn away. A bad credit business loan does check your credit score but usually not for scores below 500. This business loan underwrites your credit score in the context of your existing business so if you have a monthly revenue of $8,000 or more, your odds of getting a business loan are good. In some cases, larger loans may require you to submit tax returns and bank statements for consideration. Sometimes all they need is your revenue and identification.
Be prepared to pay more for a loan if you’ve got bad credit. Because lenders are taking on more risk by lending to people with worse credit scores, they need to compensate. That’s why the interest rate may be anywhere from 12 percent to 45 percent.
A merchant cash advance isn’t really a loan in the traditional sense. The funder is essentially advancing you money against your business’ future sales. In fact, some of them don’t require much paperwork at all and they skip the credit check. Your past bankruptcy will not be an issue; the funder cares about your current cash receipts. They may only ask for your name, address, and bank statements to fill out the application. You repay a percentage of each credit card sale you make. That percentage is a combination of the original money you borrowed plus the profit for the funder. That rate starts around 15%, and can top 100%. MCAs are easy to get, but not cheap.
Merchant cash advances are really designed for businesses with a lot of card transactions, such as salons, restaurants, and grocery stores. If you don’t get paid often with cards, or by cards at all, then an MCA isn’t the best choice for you. And if you already carry advances whose payments the business can no longer keep up with, more funding is not the answer. That is where a business debt settlement company like ours comes in: our senior advisors negotiate with funders and lenders for less than the full balance owed, and we do not sell you another loan.
If your business has a large balance of past-due receivables, consider invoice financing or factoring. Accounts receivable lenders will extend credit against them, smoothing over temporary cash flow dips. Invoice financing is a loan: you pledge your receivables, and your personal credit and your bankruptcy don’t matter; the lender may check your customers’ credit. In the world of factoring, a factoring company buys your invoices outright at a discount, and they’re responsible for collecting on them. You’re out. You should be careful about who you let grab your receivables. An aggressive collector could damage your long-term relationships with customers. An invoice lender will also set aside a reserve in case any customers default. An advance may be 80 to 85 percent of an invoice’s face value or even lower.
A term loan is a loan that you repay over a fixed period of time. With a fixed rate, the monthly payment stays the same. An alternative lender can provide you with a short-term loan that will be repaid over the course of two months to a year and a half. Short term loans can be approved in as fast as 24 hours and funded within a few days. Approval is based on annual revenues, among other factors. Lenders prefer short repayment terms to minimize the chance that a borrower doesn’t pay back the loan. The capital plus interest is typically squeezed into a shorter time, resulting in higher payments than a similar term loan. Repayment plans are flexible, but generally made via automatic deductions from the borrower’s business bank account. The lender will determine how frequently payments are made: monthly, bi-weekly, weekly or even daily.
If poor money management or a lack of business knowledge led to your bankruptcy, don’t make the same mistake again. You’ll need to choose the right lender. Research companies online, or even ask local businesses for suggestions. List down the lenders, and compare their rates, fees, and terms. Call a few to get quotes, since lenders that specialize in high-risk loans don’t all offer the same terms and rates. You may be able to find a better deal. Apply the same scrutiny to anyone you pay for help with debt. At Delancey Street, our fee is one percentage of the total enrolled debt, quoted in writing before any work begins. When borrowing money it’s best to go with an experienced lender. One that knows how to service loans and will ensure that you’re not approved for anything more than you can repay. This is especially reassuring if you feel a bit shaky about your financial skills after having filed for bankruptcy.
You Should Wait if You Can
If your bankruptcy will be off your credit report shortly, you might want to wait until then to apply for funding. Cut your business’ expenses or borrow from friends or family to get by. Consider outsourcing a large order, instead of borrowing to buy equipment, or even borrow or sub-lease equipment from another manufacturer. Ask a customer if they can shift their production timeline. You may be able to find other creative ways to put off needing money.
After two years, the lender starts viewing your business as more stable. Unless you have no choice but to get money today, you should wait if you can because the fees and rates reflect how much risk the lender is taking and what they stand to make. Since you’ve gone through a bankruptcy, they’re going to charge more. Pay less by being further away from a bankruptcy and showing a longer period of successful operations.
Ways to Strengthen Your Application
Once you have found a lender who works with borrowers after bankruptcy, there are ways to strengthen your application. Higher revenue means you’re more likely to qualify since alternative lenders consider your monthly revenue. Try to promote your business, especially through free methods like social media. See if friends or family can post a positive review. Throw a few dollars behind some new customer marketing. The better the marketing, the more revenue, and the easier getting approved.
After a period of time, the bankruptcy will fall off your credit report. In the meantime, work on improving your credit score in other ways. Not all lenders check, but having a better score can’t hurt. Late or missed payments will definitely affect your score, so make sure you set up auto-pay. If you make a late payment for the first time, make sure you call your creditor and ask them not to report it. Lenders typically look at your debt service ratio, which also affects your credit score. Pay down revolving balances like credit cards.
Many successful business owners failed before they succeeded. Apple fired Steve Jobs, for example. The fact that you’ve filed bankruptcy in the past shouldn’t prevent you from getting capital if you’re doing well in your business now. You will have to pay higher interest rates and fees after bankruptcy, but oftentimes you can pay off early if there is no prepayment penalty, so the true cost might be much less than you think.
If the trouble is not new capital but the debt you carry now, talk to us before you decide anything. A first consultation with Delancey Street is free and confidential, and if a case cannot be won, or bankruptcy counsel such as Subchapter V is the better path, we say so on the first call.
