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Can Bankruptcy Prevent You From Getting a Small Business Loan?

While some people bootstrap their way to a small business, about 40% of people get a loan to get started. If you have dreams of starting a small business you might therefore hesitate to declare bankruptcy, wondering if doing so will put an end to your dreams.

Here’s good news: declaring bankruptcy is unlikely to stop you from starting your own business. It’s also unlikely to stop you from getting a loan, or even an investor.

For one thing, your personal credit score is likely to improve. This may seem counterintuitive, but it has a lot to do with the way the algorithm calculates credit scores. 

Having dozens of unpaid collection items can tank your score by a huge margin. Your debt-to-income ratio is also likely to be very high pre-bankruptcy. Post-bankruptcy, your DTI shrinks. 

You may not have available credit yet, but you can usually fix that with a secured card. Make the payments on time for two years, and watch your credit score soar. 

No, you’re not going to get a business loan the day after your discharge. Yet some people find getting a post-bankruptcy business loan is even easier than getting a post-bankruptcy mortgage, and people get those every day. 

There are bankruptcy-friendly business lenders just like there are bankruptcy-friendly home lenders. So having a solid business plan and perhaps some coaching and classes from a local SBA chapter under your belt could make a much bigger difference than your personal bankruptcy. If you’re already running a business and are looking to expand then your P&L statements will matter more than your personal credit history.

If you can, try starting your business without money first, leveraging the Internet and gathering sales before you go looking for money. In today’s Covid-19 climate this is easier than ever because people expect businesses to be operating virtually and for people to be working from home. Nobody cares if you have a fancy office.

Remember, there are hundreds of highly successful millionaires and even billionaires who have declared bankruptcy in the past. They bounced back from personal bankruptcies and went on to create some of the most successful businesses in the world.

Building your business may even help you rebuild your lifestyle after bankruptcy.

If anything, bankruptcy will help you out by letting you start fresh, clearing away all the debts and monthly payments that may be stopping you from launching right now.

See also:

How Charge-Offs Impact Your Credit 

4 Tips to Rebuilding Credit After a New York Bankruptcy

What Is it Like to Declare Bankruptcy? 

 

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