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Borrowing After Bankruptcy

By Karen E. Klein Q: My business was forced to file bankruptcy last year. We'd like to make a new start, buy equipment, and pursue larger advertising. Can we get an SBA loan? If not, will I ever be able to get one in the future? Do I have other options?

-- T.E., Cincinnati.

A: A bankruptcy -- particularly a recent one -- is definitely going to be counted against your business when a bank evaluates your credit worthiness on a loan application. Unfortunately, the mark stays on your record for 10 years. Nonetheless, it may not be impossible for your company to get a new loan, experts say, particularly if you are willing to pay higher interest rates and put up substantial assets as collateral.

TANGIBLE ASSETS. The Small Business Administration does not make loans directly, but it does guarantee loans for small-business owners through banks or other lending institutions. There is no specific policy that prevents the SBA from guaranteeing loans for companies that have declared bankruptcy, says Jim Hammersley, director of the SBA's Office of Business Loans.

"However, declaring bankruptcy is an issue in a person's credit history that would have to be thoroughly reviewed during the credit-underwriting process," he says. "Whether a person who has declared bankruptcy receives an SBA guaranty on a particular loan application would depend on the terms of the proposed loan and the loan officer's determination of the ability of the applicant to handle the debt service."

When it comes to loans for new equipment, you shouldn't have too much trouble, according to M. Jonathan Hayes, a Woodland Hills (Calif.)-based attorney specializing in bankruptcy. "If you're talking about secured debt -- which means that the loan can be secured with tangible assets, like new equipment -- you can get credit without much trouble, whether you have filed bankruptcy or not," Hayes says. "The interest rate you pay will probably be higher, and they'll require a larger down-payment."

FRIENDS AND FAMILY. An unsecured loan, with the money to be used for intangibles like additional advertising, will probably be tougher to get, Hayes says. "If there's collateral, like equity in your home that you're willing to put up or equipment they can repossess if you default, the lending institution's risk is much lower than it is with unsecured debt," he says.

If you have a hard time getting a banker to take another chance on your company, you might investigate such options as asking friends or family with sufficient net worth to co-sign on a loan, suggests H. Jason Gold, a bankruptcy attorney with Wiley, Rein & Fielding in McLean, Va. If that's not an option, you might also consider forming a joint venture or bringing in a partner without a bankruptcy on his or her record. It's all about making a fresh start.

Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues

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