Is bankruptcy the end of your dream of starting a new business or growing an existing one – or is it possible to get a business loan after personal bankruptcy?
Depending on the type (Chapter 13 or Chapter 7 bankruptcy), a bankruptcy filing often stays on a person’s credit report for between seven to 10 years, according to CNBC. Also, though it provides an opportunity for a fresh start, personal bankruptcy affects a person’s credit score.
“A person with an average 680 score would lose between 130 and 150 points in bankruptcy. Someone with an above-average 780 score would lose between 200 and 240 points,” said Debt.org, a platform that helps people understand and overcome their debts. “In the end, both people would be tagged risky borrowers, making it difficult or impossible to get loans or unsecured credit.”
Given that most traditional lending solutions are big on credit scores, individuals with a personal bankruptcy on their records are often, rightly, concerned about the prospect of ever getting a bank loan, at least within the period that bankruptcy stays on their record (for seven to 10 years).
In this article, we will consider whether personal bankruptcy is an absolute deal breaker for individuals looking to secure small business loans. We’ll answer the question, “can I get a business loan after bankruptcy?” by considering the following:
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At the heart of the traditional lending system is creditworthiness. Before banks take the risk of lending money to an individual or a business, they have to be sure that the person has a good credit record, as reflected in their FICO scores or any other credit scoring system.
In the case of FICO, your credit score is composed of multiple factors, shown below.
Based on FICO’s scoring system, which ranges from 300-850, a good credit score is between 670 and 739. Other lenders also use a 690-719 range to define a good credit score.
Banks often make much of a potential debtor’s credit score before deciding to lend them money – personal loan, small business loan, mortgage, auto loan, among others (including whether to give an individual a credit card).
Consequently, with personal bankruptcy leading to a significant reduction in credit scores, it is almost impossible for traditional lenders to positively consider small business loan applications from such individuals.
Even when the individual has improved their credit score, the very presence of a personal bankruptcy record in their credit history is often a deal breaker for many traditional lenders.
However, such individuals can opt for secured loans, where the availability of a collateral can reduce the emphasis on good credit score. That is, with a valuable asset as collateral, many banks might be willing to take the risk of giving out a small business loan to someone with a personal bankruptcy record.
However, “the biggest downside to a secured loan is that the lender can seize an expensive, valuable business asset if you default,” according to the US Chamber. “If you've invested a lot of money in that asset and have built up equity, you can lose it all instantly if the lender claims that property.”
Furthermore, many small businesses might not have the kind of asset that banks might demand for secured loans. Or if they have it, the value might not be as high as the bank demands. In essence, secured loans are often impractical for many small businesses since these loans can be denied for many reasons.
And even if the small business owner has an asset that qualifies, the loan process can take a significant time, which makes it less useful when the small business has more urgent cash flow needs.
In essence, accessing a business loan after personal bankruptcy from traditional lenders is an almost impossible feat. Even when it is possible (secured loans), the hurdles can make it practically unavailable.
Another way to improve one’s chances is to enlist a co-signer. A co-signer is someone with good credit history that can sign the loan application together with the main applicant. The co-signer agrees to personally guarantee the loan, meaning they will be responsible for repayment if the main applicant fails.
However, getting a co-signer to personally guarantee a business loan might be difficult and even the presence of one does not automatically result in a successful application. Moreover, not all traditional lenders accept co-signers.
What about SBA loans?
An SBA loan is “a small business loan that is partially guaranteed by the government (the Small Business Administration), which eliminates some of the risk for the financial institution who is issuing the loan,” said Forbes.
Traditional lenders in SBA’s network are often more confident giving business credit to small businesses coming from SBA because the government will pay part of the loan if the debtor defaults.
Consequently, they might be willing to relax some of their ideal requirements. For example, the SBA does not have a fixed credit score range that qualifies one to apply for a loan. Neither do they have a requirement that automatically excludes those with a personal bankruptcy record. In fact, the SBA states that “even those with bad credit may qualify for startup funding.”
Nevertheless, the SBA gives freedom to partner lenders to impose the lending criteria they desire. According to them, “lenders and loan programs have unique eligibility requirements.” This means that some of them still require a minimum credit score (up to 600) and will refuse to give loans to someone with a personal bankruptcy record.
Therefore, while an SBA loan is much possible with bad credit, there is no guarantee that business owners will find a lender in the network willing to lend them money.
As summarised by Janover, a platform connecting SBA 7(a) lenders and borrowers, in regards to SBA 7(a) loans: “Can bad credit keep you from getting an SBA loan? Not always. But because most traditional lenders will require a personal credit score of around 700, you will likely need to first build your credit into a good shape before applying for an SBA 7(a) loan.”
Is all hope then lost for business owners with a personal bankruptcy record?
There is another option: online lenders.
Many online lenders are willing to overlook a personal bankruptcy record given that the potential borrower meets certain other conditions. This can include having a certain level of business revenue, building the credit score to a certain minimum (some go as low as 500), being in business for a certain number of years, presenting a business plan and relevant financial records, etc.
Online lenders are often a more accessible option for business owners with bankruptcy records, providing various alternative small business loans (lines of credit, micro financing, P2P lending, accounts receivable financing, among others). Apart from their willingness to accept lower credit scores and ignore the personal bankruptcy record, the loan process might not be as drawn out as a traditional lender even though the former also scrutinises the company’s records.
Nevertheless, there are certain disadvantages involved in taking this option.
For example, because applicants with personal bankruptcy are considered riskier, lenders will compensate with higher interest rates (which can be excessive, in many cases). As Forbes put it, “the lowest rates are only available to the most qualified borrowers, and business owners with bad credit are typically offered rates near the top of the APR range.”
Relatedly, borrowers of these types of loans have to endure higher fees. Forbes continues, “lenders that specialize in borrowers with bad credit often charge more fees than other competitors. For example, you may have to pay higher origination fees, late payment fees or prepayment penalties to help offset the institution’s risk of lending."
These loans might also include some onerous terms in the repayment plan – like requesting for a weekly instead of monthly repayment or penalising early repayment.
While the presence of a co-signer with good credit history can reduce fees, interest rates, and onerous terms, finding one can be difficult. And, as with traditional lenders, not all online lenders will accept a co-signer.
Finally, some lenders might have a loan application process as long as traditional lenders. As said above, in lieu of a good credit score, they will undertake a rigorous evaluation of the business’ books.
In essence, while business loan after personal bankruptcy is more accessible with online lenders, there are disadvantages that entrepreneurs and business owners must consider.
What then? Are business owners condemned to high interest rates, high fees, onerous terms, and a possibly extended loan application process?
No!
Duckfund, a lending company, is providing small business loans that are accessible, cost effective, and time efficient.
Regarding accessibility, Duckfund does not consider FICO scores at all unlike traditional lenders, SBA lenders, and online lenders who consider it at varying degrees of importance. Similarly, it does not disqualify business owners with past bankruptcy.
Rather, Duckfund offers small business loans based on a quick assessment of the business’ model, supply chain, and its ability to repay (through its financial records). Therefore, instead of obsessing over FICO scores, it takes a more comprehensive view of the company.
Also, Duckfund offers affordable interest rates and repayment terms that are designed to the benefit of the borrower. For Duckfund, small business loans should be aimed at helping small businesses thrive rather than making life even more difficult for them. It is this principle that underlies its interest rates and repayment terms.
Furthermore, the loan application process has been streamlined to make it time-efficient. Business owners can complete the application process within a minute. What is more? They can also get their loans within 24 hours of application. In this way, they make it possible for business owners to use their loans to meet urgent needs.
Duckfund’s process is also very flexible. As businesses grow their revenue and reduce their outstanding debt, they can qualify for even larger loan amounts and lower interest rates. This reinforces Duckfund’s desire to be a small business partner rather than a far-removed and unconcerned lender.
Getting the right business financing at the right time is often a matter of survival for small businesses and Duckfund is willing to contribute to survival and growth.
[Are you ready to start or grow your business even with a personal bankruptcy record on your credit report? Sign up for Duckfund’s small business loans and get the cash you need within 24 hours.]
