I filed for personal bankruptcy several years ago because I purchased business property, was lied to about its condition, and had to put so much money into repairs I had nothing left to cover my bills. The bankruptcy included a Small Business Administration loan, but now I've rebuilt my business and am in the black. I need a line of credit for the purchase of equipment and inventory. How can I increase my chances of getting one? —B.S., Centralia, Ill.
There's no question that getting a bank loan or line of credit is tough today, even without a bankruptcy on your record. However, it may not be impossible, particularly if you're willing to take some time and you have customers and suppliers who will vouch for you.
A bankruptcy can hurt your chances of getting new credit for at least seven years, says Robert C. Seiwert, senior vice-president of the Center for Commercial Lending & Business Banking at the American Bankers Assn. "What gets damaged in a bankruptcy is the view of your character. A banker wants to know, even if you have the money to repay a debt, will you? If you get into trouble, will you work with the bank or walk away?" he says.
Your best bet is to approach lenders at community banks who use traditional underwriting methods to evaluate creditworthiness. "The bulk of community banks evaluate your application by sitting down and talking with you, looking at your specific collateral and your cash flow," Seiwert says. This is in contrast to most larger banks, which make loan decisions primarily through an automated credit scoring system—one that will likely cast you as a bad risk.
Sit down with a loan officer at a community or small regional bank and explain what happened in the property dispute, how you've rebuilt, and what you need now. Be up-front about the bankruptcy and what you did—if anything—to help maximize the recovery on your SBA loan.
"If you can show that you did your best to make good on your obligations after the fact, or that you intend to pay back that loan now that you're profitable again, that will go a long way to restoring that chink in your character that the bankruptcy suggests," Seiwert says. Asking a customer or colleague to make an introduction for you at a bank can also help, and if they are willing to co-sign a loan guarantee for you, that would definitely improve your chances.
Work Your Way Up
Start off asking for a small amount and work your way up to a larger loan or credit line as you build up a positive earnings record and improve your credit score, suggests Hugh E. Connors, senior vice-president of Comerica Bank's (CMA) Western market group. If you make all your payments on time for two years, you'll likely be given an opportunity to borrow more. On the other hand, "the lender will not hesitate to cancel any and all credit immediately if there are any issues, on the theory of 'Fool me once, shame on you. Fool me twice, shame on me,' " Connors says.
Talk to three to five bankers. Even if you get turned down initially by all of them—which is likely—make note of those who seemed most receptive to you personally and had the best understanding of your business. "Stay in the loop with those bankers. Contact them occasionally and let them know about your progress," Seiwert says. "It's absolutely critical that you keep following up" to improve your chances of getting a line of credit in the future.
In the short term, you might ask friends or customers to lend you the money you need. Consider leasing equipment and asking suppliers for credit terms on your inventory. "Seek our financing from nontraditional lenders, such as finance companies, factors, or asset-based lenders," Connors says. Look for companies that specifically work within your industry and be careful to check out rates and fees, which will be higher than you'd get from a bank.
A final idea would be to attract a partner with a stellar credit history that could offset your own. "Some—but not all—lenders will accept the risk, predicating their decision on the partner with good credit," Connors says.