These are tough times, and the many business owners are facing severe hardships. Government loans and grants are keeping some afloat for the time being, and that is good news. The prospect of additional government loans to small businesses also can help. The prospect of bankruptcy looms in the background. As with most business decisions, understanding your options is the first and most important thing to do.
Common Types of Bankruptcy
As background, consider the following general information about the two most common types of personal bankruptcy:
Chapter 7: Chapter 7 is a liquidation bankruptcy in which most of your property is sold and the proceeds used to pay your debts. Your unsecured debts (e.g., credit card debt and medical debt) will be discharged. Unless you are a sole proprietor, however, your business debts still will need to be repaid.
Chapter 13: Chapter 13 is a reorganization bankruptcy in which none of your property is sold but you are required to repay a portion of your debt over a period of time (usually three to five years) according to a court-ordered repayment plan. Once the plan is completed, any remaining debt may be discharged.
The bankruptcy rules are complicated, and any decision you make should be made in conjunction with advice from a professional who reviews your situation and advises you accordingly.
Options for Getting a Business Loan Post-Bankruptcy
Although filing for bankruptcy will give you a fresh start, deciding to file is a serious decision that has financial ramifications going forward. For instance, the bankruptcy will stay on your credit history for 10 years for Chapter 7 and seven years for Chapter 13. In addition, your credit score will drop, so you can expect any credit you do qualify for to be more costly. As you look for new funding sources, it is important to be clear about the potential risks and liabilities you might incur if you can’t repay the loan.
It will take time to rebuild your credit, but it can be done. In the meantime, you need to strategize ways you can get the financing you need to keep your business going. Consider the following options:
Alternative financing: Banking regulations may preclude you from borrowing from traditional lending sources. Alternative lenders may be an option because they aren’t bound by the same rules. However, these lenders charge higher interest and fees.
- Merchant cash advance (MCA). With a merchandise cash advance, a financing company advances you cash in exchange for a percentage of your daily credit card and debit card sales, plus a fee.
- Revenue-based financing or royalty-based financing (RBF). With RBF, investors provide capital in return for a fixed percentage of ongoing gross revenues, with payment increases and decreases based on business revenues. The repayment amount usually includes the initial loan amount plus a multiple.
- Lenient lenders requiring a shorter waiting period. Depending on the circumstances, some lenders will consider lending to you even if you have filed for bankruptcy in the last year or two. Your loan terms, however, may be affected.
Secured credit cards: Secured credit cards look like unsecured cards, but they aren’t the same. The lender will require you to “secure” the card with a cash deposit that is equal (or close to) the card’s credit limit.
Cosigners: If you need to get a loan immediately and can have someone with good credit cosign your loan, you may be able to obtain more favorable loan terms.
The best things you can do while you are waiting for your credit score to improve is pay your bills on time and, if you do have a loan, keep your debt-to-credit ratio as low as possible.
If you need help with your bankruptcy filing contact an MCB Advisor at 703-218-3600 or click here. To review our tax news articles, click here. To learn more about MCB’s tax practice and our tax experts, click here.