Personal bankruptcy can be a minefield and can be one of the most unpleasant experiences a person can go through. But does it mean you won’t be able to secure small business loans until you’re discharged – or potentially forever? Thankfully, the answer is no, though you are likely to face additional challenges when seeking a small business loan. Here’s how to overcome them.
Establish a solid business credit score
Separating your personal and business credit histories is a good way to minimize problems in the past. To see whether you have a business credit file, you should contact one of the major credit bureaus and make an inquiry. If your business credit score is reasonably good, you should be able to secure affordable finance despite your personal circumstances.
Build on existing relationships
People like to do business with people they know. In other words, if your company has borrowed from a bank in the past (and of course made repayments on time), that institution should be your first port of call. Since your loan manager is aware that you are a responsible businessperson, any mishaps or misjudgments in your private life will be of minor importance to gaining small business loans.
However, if you’re looking for your first small business loan you will have to start from scratch. Lenders have different criteria when offering finance, but the vast majority subject first-time borrowers to greater scrutiny, and as a result may wish to inspect your personal credit score.
Draft a great business plan
If your business is relatively new and your personal credit history is checkered, you’re going to have to write a killer business plan. Your business plan should indicate where you see the business going and explain how you intend to run it, and should include forecasts of expected revenue and expenditure, with a clear indication of your financial contingencies.
A business plan is not simply a wish list or a statement of intent: you need to back your arguments up with facts and figures and must ensure that your forecasts and assumptions are reasonable and realistic. It is possible that different lenders may require your business plan in different formats, so you should inquire in advance and ensure that you adhere to their criteria.
Consider using an alternative lender
When banks refuse to lend, alternative lenders often will consider small business loans. Their services vary from firm to firm, but typically include asset-based finance – secured on your premises, plant and equipment – and invoice factoring and discounting. These latter forms of finance allow you to borrow against the value of your invoices as soon as you issue them, with the loans being repaid when your customers pay you.
With invoice discounting, you retain control of your own debtor ledger and deal with your own credit control, whilst with factoring the finance company takes over the ledger and pursues your customers for payment. Each approach has its own advantages and drawbacks, and your decision should be based on the strength of your credit control team and the quality of the relationships you have with your clients.
Get your timing right
If you don’t need business finance immediately, wait until your bankruptcy has been discharged, at which point it will be far less of an issue. In fact, it’s worth double-checking to see whether you are discharged already, in which case you can immediately take steps to secure the small business loan you need.
Even if your bankruptcy has not been discharged, banks may look more favorably on an older bankruptcy than a more recent judgement, so it can pay to wait a while.
Don’t give up too easily
Above all, don’t lose hope if you receive a few rejections. Whatever your personal circumstances, you stand a realistic chance of getting a small business loan if you have a viable business and a strong vision of the future. Be clear, be persistent and be persuasive, and irrespective of your circumstances you stand a good chance of being successful.