How Long Before Qualifying for Financing After Small Business Bankruptcy?

Declaring bankruptcy can feel like the end of the world for a small business owner. You’ve worked so hard to build your business, only to have it come crashing down. Now your credit is wrecked, you have hardly any money left, and you’re not sure how you’ll ever recover. But take heart – there is life after bankruptcy! With some strategic planning and perseverance, you can rebuild your business and get back on the path to success.

The first question most entrepreneurs have after bankruptcy is “How long before I can qualify for financing again?” Unfortunately there’s no one-size-fits-all answer. It depends on several factors, including the type of bankruptcy, your credit score, income, assets, and the lender. But the general timeline is 2-7 years before getting approved for a small business loan post-bankruptcy.

Waiting Out the Bankruptcy

Bankruptcy stays on your personal credit report for 7-10 years. That’s how long the public record will show your bankruptcy filing. However, the impact on your credit score tends to decrease after 2 years. So most lenders will want to see at least 2 years of reestablished credit since the bankruptcy discharge before considering your loan application.

During the waiting period, focus on rebuilding your personal credit by making all loan and bill payments on time, keeping credit card balances low, and disputing any errors on your credit report. The stronger your post-bankruptcy credit profile, the better your chances of loan approval down the road.

Bankruptcy Type Matters

The most common types of bankruptcy filings for businesses are Chapter 7 liquidation and Chapter 11 reorganization. Chapter 7 wipes the business slate totally clean by liquidating assets to pay creditors, while Chapter 11 allows the business to restructure debts and continue operating according to a court-approved plan.

In most cases, Chapter 11 bankruptcy looks better to lenders than Chapter 7. That’s because the business is still running and able to repay some of what it owes. If you filed Chapter 7, expect to wait longer before a lender will work with you again.

Get Your Financial House in Order

To qualify for financing post-bankruptcy, you’ll need to demonstrate that you’ve learned from past mistakes and have a solid business plan for future success. Here are some tips:

• Have at least 2 years of clean personal and business tax returns.
• Show strong cash flow, earnings, and profit margins.
• Keep excellent records of sales, expenses, inventory, etc.
• Only take on new debt you can conservatively manage.
• Keep business and personal assets separate.

The stronger your post-bankruptcy financials, the better your chances at financing approval. Be prepared to explain past difficulties and convince lenders you’re now a good risk.

Explore Financing Options

While you’re rebuilding your profile, research different financing options so you’ll be prepared when the time is right. Each type of lender looks at applications differently.

Bank Loans

Getting a loan from a traditional bank will be tough right after bankruptcy. Most banks won’t even consider an application until 3-5 years after discharge. Even then, expect to put up collateral and pay higher interest rates.

Credit Unions

Since credit unions are member-owned nonprofits, they may be more flexible than banks when working with bankruptcy applicants. They’ll still want to see you’re a low risk, but may offer better rates and terms.

Online Lenders

Online lenders like Kabbage, OnDeck, and CAN Capital often approve loans faster and with less stringent requirements than banks. This makes them an option worth considering post-bankruptcy, especially if you have solid recent financials.

SBA Loans

The U.S. Small Business Administration guarantees loans made by approved lenders to qualifying businesses. According to SBA guidelines, applicants are eligible if the bankruptcy was discharged more than 12 months ago. SBA-backed loans often have lower down payments, longer terms, and lower rates than conventional financing.

Alternative Lenders

Merchant cash advance companies and peer-to-peer lenders are less risk-averse than traditional financiers. They may approve loans based on business assets and cash flow rather than credit alone. Just be cautious of predatory lenders charging very high interest rates or fees.

Friends and Family

Don’t underestimate the power of your personal network! Asking friends or family to invest in your business can be a win-win if approached strategically and ethically. Offer notes or equity at fair rates and terms.

Talk to an Attorney

Consulting a small business attorney can help you understand the bankruptcy process and timeline, rebuild your company’s profile, and find financing. An attorney experienced with commercial lending can offer guidance tailored to your unique situation.

The waiting period after bankruptcy can be frustrating, but it allows time to reflect, recover, and prepare for the future. With diligence and patience, you can position your business to prosper again. So don’t lose hope – your next chapter may turn out to be your greatest success story!