Bankruptcy can ease unmanageable debt situations. A court order absolves you of debts that cannot be repaid with your available assets. So you have the opportunity to start fresh and reorganize your finances. This is the tasty part of it.
Bankruptcy also has its ugly end. This seriously damages your credit profile and puts you in trouble with lenders when trying to get small business loans in the future. This leaves many people wondering: can you get a small business loan after bankruptcy?
The point is, it won’t be easy to get a business loan from traditional lenders after bankruptcy. Fortunately, some alternative lenders offer small business loans for bad credit.
How Bankruptcy Affects Your Credit Score
Bankruptcy has a serious impact on your credit score. Depending on the FICO scoring model, your credit score can drop 130 to 240 points down. This makes it difficult to get approval for financing a business after discharge from bankruptcy.
A Chapter 7 bankruptcy will stay on your credit report for 10 years, while the effects of a Chapter 13 bankruptcy will erode your credit score 7 years later.
However, the impact of bankruptcy on your credit score diminishes over time. As long as you can show a recent history showing that your finances have changed, you have a chance to get small business loans for bad credit.
Most banks / lenders require a good credit rating
Banks and other lenders rely on your FICO score to assess your liability for debt repayment. They love to see good to great scores (680-850) to put you in the “good risk” category and approve you on favorable terms.
Anything less than 680 will cause you to be labeled “bad risk”. In this case, two things can happen. The lender may refuse to lend you or approve you for a bad credit business loan. You will be affected by high interest rates and adverse loan terms.
Banks, therefore, do not favor borrowers who have marred their credit reports with a mark of bankruptcy.
Lenders and loans designed for people with bad credit
Alternative lenders seem to understand that bankruptcy doesn’t have to be the death nail in an entrepreneur’s life. They have bad credit small business loans designed to help people with bad credit get financing for their business. Online lenders lead the pack in this category.
The different types of bad loans include:
- Short term business loans
- Cash advances from traders
- Secured business loans
- Invoice financing
- Business credit cards for bad credit
These come with high interest rates, but they’re better than nothing. More than anything else, they will help you rebuild your credit and will appear as a “good risk” to lenders in the future. Here’s how to get business loans for bad credit:
Check your credit score
Check your credit score and find out where you stand. You might be surprised to find that your score is not as bad as you thought. Once you know your score, you can improve it and find the perfect lender.
Improve Your Credit Score
Taking a few months to improve your score can help you get a better interest rate and lower your cost of borrowing. Get a secure credit card, pay your bills on time, reduce your credit card usage, and dispute any errors on your credit report.
Shop for a lender
Share the details of your bankruptcy with lenders and ask for their minimum credit score requirements. Online lenders and other alternative lenders are more likely to accept people with bad credit or no credit. Banks are much less likely to take in a “bankrupt borrower” or lend to a business with a bad credit rating. Once you’ve found a lender, analyze their terms to make sure you get a fair deal in your current state.
Get Small Business Loans For Bad Credit
As you can see, it is possible to get a business loan after bankruptcy. Your best bet is to seek out bad credit business loans from alternative lenders. Some lenders like Camino Financial do not require a minimum credit score. In addition, they help you improve your score and possibly a chance to get approved for a small business loan as long as you can demonstrate an effort to improve your finances.