Personal Bankruptcy and Your Small Business Loan

Personal Bankruptcy and Your Small Business Loan

Written by Caitlin Wood
Last Updated June 11, 2021

Personal bankruptcy is both a complicated and stressful process, it will take a serious toll on your personal finances and can affect your personal relationships and even your job, especially if you’re a small business owner. While keeping your business life separate from your personal life is probably a goal of yours it’s also extremely difficult. More often than not if you’re having personal financial problems your business is going to be affected, this is why we want to equip you with the knowledge you need.

Applying for a small business loan after you’ve filed for personal bankruptcy can be intimidating and challenging but the good news is it’s not impossible. Below is a checklist with all the information you need to increase your chances of being approved for the business funding you need, post personal bankruptcy.

1) Establish a Business Credit Score

Since your personal credit score is definitely not so great now that you’ve filed for bankruptcy you need to establish a credit score for your business. Keeping your personal and business credit scores separate will make sure that one is not affected by the other should you experience more financial issues in the future.

First you should determine whether or not you already have a business credit score. To do so you can contact one of the three major commercial credit reporting organizations in Canada: Dun & Bradstreet, Equifax or TransUnion. You need to be able to prove that your personal credit score is officially separate from your business’s credit score, this is very important for those who have filled for personal bankruptcy and are trying to get a business loan.

2) Disclose All Business Assets during Personal Bankruptcy Proceedings

This is something you must beware of during the bankruptcy process as is can greatly affect your ability to get a business loan in the future.

While you are in the process of filing your personal bankruptcy you need to be very open and honest about your business and any assets that it might have. Your bankruptcy trustee must be ware of any and all assets as they could be used to pay back your creditors. The reason this is so important is because if you fail to declare your business’s assets during your personal bankruptcy and then try to use them to secure a loan in the future your business could encounter some serious legal issues. Furthermore do not under any circumstance try to sell or transfer your business’s assets before you file for bankruptcy, this could potentially lead to fraud charges.

3) Consider Previous Lenders

Business relationships matter and whether you believe it or not will make a difference when looking for a business loan. So if you’ve had a business loan in the past or have some type of relationship with a lender then you should consider using that connection to get the loan you need now.

If you’ve previously had a business loan and made your payments on time and were always cooperative then that lender might be willing to overlook a personal bankruptcy. If you’ve been running your business for a long period of time and have a detailed small business credit history then your personal bankruptcy might not have any effect on your ability to get approved for a business loan.

On the other hand if you’ve never had a business loan before and you have no relationship with any lender and are shopping around for a loan you will more than likely have a hard time. First- time borrowers are put under a larger microscope and your potential lender will probably request your personal credit score.

4) Timing is Key

When trying to apply for a business loan after you’ve filed for personal bankruptcy you need to be aware of the timing. A personal bankruptcy can stay on your credit report for up to 7 years, this means anyone who request a copy of your credit report will know that you’ve filed for bankruptcy in the past.

Obviously this all depends on how long ago you filed for bankruptcy, if it was 10 years ago you probably won’t have as much difficultly as someone who just filed for bankruptcy last year. Generally speaking most lenders have their own guidelines on how long after filing for bankruptcy you need to wait before applying for a small business loan, typically its 2 years. You should also be aware that you’re interest rate will be higher than you expect and the conditions of your loan might not be as favourable as you would like.

5) Create the Best Business Plan Possible

Your business plan is an extremely vital component of your business loan application and the process as a whole. Dealing with a personal bankruptcy will make your business plan even more important. Anyone who is applying for a business loan needs to have a business plan that outlines how they, as the business’s owner, plan to operate the business, produced revenue and deal with any and all possible issues or outcomes. Your business plan needs to include realistic expectations and figures and all the documentation necessary to show that are capable of running your business.

Before you submit any loan application it’s in your best interest to find out what the requirements for each of your lender are, all financial institutions and lender have they own criteria for determining who they should and shouldn’t lend to.

Getting the Loan you need is Possible

While filing for personal bankruptcy can affect all aspects of your life you will get a second chance to start over. Continuing to run your small business and applying for the funding you need won’t be impossible, you’ll just have to work a little harder and weigh your options. Making sure that you follow all the rules and regulations while going through the bankruptcy process, creating a separation between your personal credit score and your business’s credit score and taking advantage of any connections you might have will all increase your chances of being approved for a small business loan.

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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