An SBA study found many small businesses rebound into thriving ventures after filing for bankruptcy. Life is not going to be the same, but with a concrete strategy for rebuilding your credit, you can start a new business after bankruptcy.
Read on to learn how to increase your chances of being approved for small business loans, find sources of alternative financing, and reboot your life as a small business owner.
Reasons for Filing Individual Bankruptcy
There are times when business debt reaches the stage where you have no alternative but to file personal bankruptcy. COVID-19, for instance, is having a devastating impact on revenue. Small businesses are losing millions of dollars with no idea of when the economy will rebound. That’s why it’s highly advisable to work together with a professional accountant like the London accountants Howlader & co. who can help you take care of the finances of your company. In certain cases, the only way to get out from under your business debt is to file for bankruptcy.
Many small businesses are set up as a sole proprietorship. This means your business is not a separate entity. As far as creditors are concerned, you are personally liable. Even if you set up a separate legal entity for your business, yet provided a personal guarantee on business debt, you are still responsible.
The only recourse may be to file individual bankruptcy to avoid the seizure of personal assets.
Should You Start A Similar Business After Bankruptcy?
Bankruptcy is not an attractive option, but it is not fatal for entrepreneurs. Like anything, starting a similar business has its pros and cons. It might seem to be the easiest way to get back on your feet. You already know the industry landscape and still have access to your previous consumers. On the other hand, you risk being accused of fraud if you open a similar business.
Depending on the type of bankruptcy you filed, previous creditors could try to collect from your new business. You should consult with a business lawyer before making any decisions about what kind of business to open.
How To Increase Your Chances Of Getting a Loan After Bankruptcy
Bankruptcy is going to hurt your personal credit score. Banks and other lenders place significant emphasis on your credit score when reviewing loan applications. Be transparent and let the bank know you filed for bankruptcy. Attach a factual accounting of the situation and explain what you have learned from the experience.
Writing a Comprehensive Business Plan
Writing a business plan that includes your strategies for maintaining healthy cash flow can improve your chances of obtaining funding. Be sure to articulate how you will use the loan funds and your plans for repaying the loan. Your financial statements need to be realistic and concrete. Moreover, your business plan will need to convince lenders why you will be more successful this time.
Consider Alternatives To Traditional Bank Financing
Startups are considered too risky by most banks. If you also have a bankruptcy on your record, your path to bank financing will be more challenging.
There are alternatives, such as venture capital. Investors care about your credit history, but they are more interested in learning how soon you will become profitable. If your new business can scale quickly and operates in a trending industry, they might overlook your bankruptcy.
Some online lenders are more forgiving when it comes to bankruptcy, however, interest rates will likely be less favorable. Alternatively, you can consider microloans, crowdfunding sites, or a merchant cash advance.
Additional Things To Consider
- Avoid repeating your past mistakes: Examine the aspects of your prior business operations. Identify what factors caused the business to fail. Develop strategies to avoid these pitfalls in the future
- Rebuild your credit score: Bankruptcy lingers on your credit report, but you can take steps to rebuild your credit score. Improving your credit will open the door to more financing options in the future
- Separate: Create a separation between your business and your personal funds. Also, put up a wall between your new business and your previous business
- Negotiate new vendor contracts: Your former vendors may be willing to work with you again. If not, secure new contracts with smaller vendors. Report your status to the business credit bureau to start rebuilding your credit
- Soliciting investors to fund your business: or recruiting partners who have excellent credit to open the business with you is another way of improving your chances of obtaining financing after bankruptcy.
Conclusion
Starting a new business after bankruptcy requires effort, however, it is important to remember that only your business failed. Utilize an experienced small business lawyer to help you negotiate the bankruptcy process and advise you on how to start over.
Learn from your mistakes and take measures to keep your finances separate from your business finances. Consider alternative sources of financing such as online lenders, short-term loans, or microloans. Above all, do everything you can to rebuild your credit to ensure access to financing in the future.
