Small business hopefuls with shaky credit histories must be prepared to explain what happened in the past—and why their future businesses will be profitable
I'm a cosmetologist and would like to open my own salon and spa. I need to borrow $30,000, but I declared personal bankruptcy a couple years ago, following a divorce. I have rebuilt my personal credit score to 630, gotten a secured and an unsecured credit card, and five months ago got a car loan. Is there any hope that I'll qualify for a small business loan? If not, do I have other options?
—J.L., Lansing, Ill.
Getting a lender to make you a business loan after a recent bankruptcy will be a tough sell. Lenders evaluate many factors when they decide whether or not to make a loan, and a bankruptcy on your record from less than 10 years ago is going to start you off with a major strike against you.
"You always need to sell a new-business loan," says J. Scott Bovitz, a bankruptcy attorney with the Los Angeles law firm of Bovitz and Spitzer. Nonetheless, it certainly can't hurt to try. Talk to a bank that specializes in small-business lending, and ask them what their criteria are for making loans to people with recent bankruptcies. If they turn you down, go to a local credit union and talk to them. Also, check in with the economic development department in the city where you want to locate your salon. The city personnel may be able to refer you to a regional nonprofit investment fund or a community development agency that makes loans to micro-business owners in low-income areas.
If you own a home, you may have less trouble getting the loan if you're willing to put that home up as collateral and pay higher interest rates, experts say. If the loan is for equipment that can be repossessed by the lender if you default on the loan, that may also make your challenge less daunting. Finding a business partner with good credit, or a relative who's willing to co-sign on the loan with you, could also increase your chances of success.
READY TO EXPLAIN.
At any rate, be prepared to thoroughly explain the circumstances that led to your bankruptcy, why it happened, and why you can make this business a profitable enterprise. Do you have the experience necessary to market your shop, bring in customers, effectively manage personnel, and handle finances? "Most new businesses fail, and banks know it," Spitzer says. You'll need to change their minds about your chances of beating the odds. Remember: Running a business is a very different thing than working for someone else. What is special about you? What should lenders take into account when making their decision? Does your neighborhood really need another salon and spa? Do the demographics support your belief that you'll have an ample customer base?
You'll need to answer all these, and plenty of other tough questions from lenders, before you can "sell" yourself as a reasonable risk for a new business loan. If you're not able to find one, you might consider asking friends or family members to invest some seed money in your venture. But before you try, get some entrepreneurial education. Free and low-cost business training and counseling are available at organizations such as SCORE (http://www.score.org), your local Small Business Development Center (http://www.sba.gov/sbdc), or through an online course such as My Own Business (http://www.myownbusiness.org). The American Bankruptcy Institute has a consumer education center that may help answer additional questions: http://www.abiworld.org/Template.cfm?Section=Consumer_Education_Center. Good luck!