Getting a Business Loan After Bankruptcy

4 min read • Dec 24, 2019 • Barry Eitel

There’s a lot of stigma around bankruptcy. In the popular imagination, a bankruptcy declaration is often seen as surrendering to failure. This view is unfortunate because bankruptcy is actually meant as a buoy for people and businesses overwhelmed with debt. The United States bankruptcy code was created so Americans could have a second chance.

However, a bankruptcy will raise red flags for lenders and ruin your credit, although this damage is relatively temporary. It is more difficult to find business funding post-bankruptcy but far from impossible. A bankruptcy does not have to kill your business—some high-profile examples of companies that kept living after declaring Chapter 11 include Best Buy, American Apparel, and the Chicago Cubs. Even Apple came close to bankruptcy in the late 1990s.

After bankruptcy, your business can rise from the ashes and you can even get funding to help your company grow.

Types of Bankruptcy

For small business owners, you should be aware of 3 types of bankruptcy. Chapter 7 is the most common type of bankruptcy in the US and requires liquidation of the business. After filing Chapter 7, a business is shuttered, its leadership is dismissed, and creditors liquidate the assets of the company for their own benefit.

While Chapter 7 requires that a business is closed, Chapter 11 and Chapter 13 call for reorganization. Chapter 13 is primarily for individuals, but this can include businesses that are sole proprietorships. With these types of bankruptcy, you need to show a court that you have a reorganization plan for how to pay back your debts—you can negotiate terms with your creditors. Both the judge and the creditors have to approve your filing.

Waiting Periods

Typically, a bankruptcy will remain on your credit report for at least 7 years. However, because the court filings are public, the fact that you declared bankruptcy would remain part of the public record if someone searches for it.

After filing for bankruptcy, you will likely have to wait some time before you can expect approval of a business loan. For larger loans, you might have to wait at least 2 years before a lender will consider your application. There are other routes, though—you might be able to receive a business credit card or apply for loans through some online services within 12 months of filing for bankruptcy.

In some cases, lenders may find some positives in a bankruptcy filing—you can’t file more than once in a 7-year period, so if you’ve already filed for bankruptcy, it means there is no risk that you will file for bankruptcy again for awhile.

Business Plan

If you are applying for funding post-bankruptcy, you’ll want to provide potential lenders with a detailed business plan. This information is important when looking for any funding, but it will take on extra importance if there is a bankruptcy on your record.

Lenders will want evidence that you know what you are doing and that you have learned from your company’s reorganization. Especially if your business is in a risky sector like restaurants or media, you should expect lenders to ask how you expect to survive.

A business plan is a specific document that outlines your projected expenses and revenue. You will want to create several plans that show how your business will do in the best case and worst case. This attention to detail will be critical to convincing lenders that you are worth the risk.

Keeping Debt Down

After filing for bankruptcy, you need to focus on keeping your debt load to a minimum. Not only is this prudent practice for your post-bankruptcy reality, but it will also be a necessity if you want to find more funding.

Paying down your debts will show to lenders that you can be financially responsible. In the first years after filing bankruptcy, it is best to avoid opening up new lines of credit altogether and, instead, focus on paying down any existing debt.

Not only will you stay within your limits, paying down your existing debts is the first step toward rebuilding your credit score after a bankruptcy hits it.

Research Lenders

If there is a bankruptcy on your record, you will have to do much more research into potential business loan lenders. Depending on how recently you filed, you will likely have to look beyond traditional lenders like banks, and you should expect that the maximum principal that you can receive to be pretty limited.

Look online using platforms like Lendio and don’t rule out utilizing business credit cards, especially if you need funding fast. Because older financial institutions like banks are usually timid about bankruptcy, a whole industry has appeared online in recent years aimed at providing funding for those with a bankruptcy in their past.

It’s worth it to do a few Google searches for online lending platforms, but you should limit your expectations when it comes to interest rates and maximum principal.

Bankruptcy Statements

Along with your business plan, you should write up some statements about your bankruptcy that you can provide to lenders. You should detail exactly why you or your company filed for bankruptcy. Perhaps an expensive divorce or illness caused your financial hardship—you should expect lenders to ask about these sensitive subjects.

You should avoid sounding too desperate or defensive in your statement. In fact, your statement should be concise and to the point. You will want to provide a factual, causal explanation of how your bankruptcy occurred. The statement will demonstrate that you are still financially responsible even though you had a misstep.

Rebuilding Credit

Rebuilding your credit will be a priority after a bankruptcy. Paying down existing lines of credit is the first step. The next step will be opening new lines of credit and demonstrating that you can be responsible with these, too.

If you are having a hard time finding new lenders soon after bankruptcy, you might have to wait until your credit score improves over time. It will if you put in the work.

Barry Eitel

Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.