When your debt load reaches the point where it becomes completely unmanageable or you’re constantly being hounded by creditors, seeking bankruptcy protection can provide you with some much needed relief. If you’re a small business owner, it also gives you the opportunity to reorganize or restructure your debts so that you’re able to keep your venture up and running and rebuild your business credit.
While there are some advantages to filing bankruptcy, there’s a significant drawback in terms of the damage it does to your credit. The impact can be particularly devastating for small businesses with business credit that rely on loans or lines of credit to operate.
Rebuilding your business credit profile after bankruptcy takes time but there are some things you can do to speed the process along.
1. Check credit reports
Once your bankruptcy filing is complete, it’s important to review your business credit and personal credit history to make sure that all of your accounts are being reported properly. Equifax, Experian and Dun & Bradstreet are the three reporting bureaus that compile business credit information. Free copies of your personal credit report are also available from Experian, Equifax and TransUnion.
You should look over each report carefully to verify that the information for your debts and payment history are up-to-date. Errors or inaccuracies can and must be disputed with the agency that’s reporting the information.
Unlike personal credit reports, there are no formal guidelines for disputing business credit errors. You’ll have to contact each of the three reporting bureaus individually to have incorrect information updated or removed.
2. Prioritize payment history
Making sure your business bills are paid on time is the easiest way to start turning bad credit around. Establishing a solid payment history can mitigate the impact of the bankruptcy and help you to appear less risky to new vendors or creditors.
If you have existing relationships with vendors or suppliers who report to the three credit bureaus, you’ve already got an advantage as long as you’re paying your invoices promptly. Keeping up with payments for things like utility bills and regular services such as equipment maintenance or cleaning also works in your favor.
3. Try a secured business credit card
If you’re making the leap into entrepreneurship for the first time after filing bankruptcy, getting a business loan or vendor credit is likely to be a much bigger challenge.
Applying for a secured card is an easy way to start building your business’ credit and you may even be able to earn some rewards along the way. These kinds of cards are also a good stepping stone if you need to improve your payment history.
With a secured business credit card, you put up a cash deposit that serves as your credit line. It could be as little as $500 or as much as $25,000, depending on the card. As you use the card, your credit line decreases and you’ll have to make monthly payments against the balance.
There are generally no limits on the kinds of expenses you can use the card for and you may be able to get additional cards for your employees. There is a downside, however, since secured cards typically carry a much higher interest rate than traditional business credit cards.
4. Consider alternative financing
Generally, it takes at least a year after you’ve filed bankruptcy for banks to entertain the idea of granting you a loan. If you’re trying to raise capital for a new or existing business right away, the odds of getting approved are pretty slim unless you have someone who’s willing to co-sign. There are, however, some other options for financing your business that may not put as much weight on your business credit.
Angel investors, for instance, use private funds to invest in business ventures. Whether they’re willing to bootstrap your business usually depends on how profitable it’s projected to be, not how good your credit is.
The money doesn’t have to be paid back but there’s a catch, since angel investors usually ask for an ownership stake in the business in return. If that’s not something you’re comfortable with or you only need a small amount of money, crowd funding and peer to peer lending are worth looking into.
5. Keep debt under control
While taking on new debt may be the only way to get your struggling business back on its feet following a bankruptcy, it’s not something you want to get in the habit of relying on. That doesn’t mean that you shouldn’t use a credit card to cover expenses or open trade accounts with vendors but it’s common sense to only borrow what you can afford to repay from one month to the next.
Maxing out your available credit lines may put you in the same position that lead to your bankruptcy filing and it can actually cause your credit score to suffer even more.
If you’ve got stable expenses but an unpredictable income, you need to come up with a plan for filling in the gaps. Building up your cash reserves gives you the cushion you need to get through the lean times without taking a toll on your still-recovering credit.
Have you had to file for bankruptcy with your business?
