Taking Out a New Small Business Loan After Debt Settlement

If you’re a small business owner who has gone through debt settlement, you may be wondering if it’s possible to take out a new loan. The good news is, yes you can! However, there are some important things to keep in mind.

First off, understand that debt settlement leaves a mark on your business credit report. When you settle debts for less than you owe, the creditors will likely report this as “settled for less than agreed” or something similar. This can negatively impact your business credit scores.

So after debt settlement, you’ll want to focus on rebuilding your business credit. Pay all new debts on time and consider getting a secured business credit card to help establish positive payment history. Give it some time for the settled accounts to age off your reports.

You’ll also want to be prepared to explain the situation to lenders. They’ll want to know why you settled debts previously and how you plan to manage any new financing responsibly. Be ready with a good explanation that shows you learned from the experience.

Types of Loans to Consider

Once you’ve rebuilt your business credit a bit, here are some loan options to consider:

• SBA loans – The SBA guarantees loans made by banks and other lenders to qualifying small businesses. Their 7(a) loan program offers up to $5 million for various business purposes.
• Online lenders – Many online lenders like Fundera and OnDeck cater to businesses with less-than-perfect credit.
• Business lines of credit – Lines of credit provide flexible access to funds as needed, up to a set limit. They may be easier to qualify for than term loans.
• Merchant cash advances – MCAs provide a lump sum of capital in exchange for a percentage of future credit card sales. They are expensive but easy to qualify for.

Term loans, SBA loans, and lines of credit will generally offer the lowest rates. Short-term loans and MCAs are more expensive. Shop around to compare options.

What Lenders Look For

When applying for a small business loan after debt settlement, lenders will want to see:

• Improved business credit scores
• Consistent revenue and cash flow
• Collateral such as real estate or equipment
• A reasonable debt-to-income ratio
• A solid explanation for previous financial difficulties

Come prepared with financial statements, tax returns, business plans, and anything else needed to make your case.

Tips for Qualifying

Here are some tips to improve your chances of loan approval after debt settlement:

• Wait at least 12 months after settling debts to apply for financing
• Pay all new accounts on time to boost your business credit scores
• Keep credit card balances low
• Be prepared to put up collateral
• Consider bringing on a cosigner with better credit
• Apply for smaller loan amounts first to prove you can handle them
• Look for lenders that offer “second chance” financing

The better you can demonstrate responsible management of any new debts, the more likely lenders will be to approve your application.

Alternatives to Business Loans

If you need funding but aren’t quite ready for another loan, some options to consider include:

• Business credit cards – Use cards sparingly and make payments on time.
• Equipment financing – Finance specific equipment purchases instead of general expenses.
• Factoring – Sell outstanding invoices to a factoring company at a discount.
• Grants – Seek out government and private grants.
• Crowdfunding – Use crowdfunding platforms to raise small amounts from customers.

These alternatives can help grow your business without piling on more loan debt.

The Bottom Line

Getting approved for a new small business loan after debt settlement is challenging but doable. Be patient, focus on rebuilding credit, and make your case to lenders. Seek out “second chance” lenders and be prepared to put up collateral or a cosigner.

With responsible use of new financing, you can put your business in a better position going forward. Just be cautious with debt and make repayments on time. Your business can recover from past financial troubles with diligence and care.