Landing a Business Loan After a Bankruptcy

It's particularly tough in this economic climate, but there are options to securing the money you need

My spouse and I went through bankruptcy in 2005 due to stock losses. I'm now employed with a $95,000 annual salary and my wife is a homemaker. We're trying to purchase a business, but although I have applied for a business loan from several banks we're being turned down due to the bankruptcy. What would be the best option for us to get funding?

—R.S.M., Woodbridge, N.J.

It's tough for entrepreneurs to get startup capital (, 2/1/08) for a business purchase, even without a recent bankruptcy on their records. If you own a home and have some equity, you may have better luck obtaining a home equity loan or line of credit, but again the bankruptcy is likely to be a major strike against you. And this is a particularly bad time to apply for a loan (BusinessWeek, 8/11/08), with many banks tightening their lending standards due in part to the losses suffered in the mortgage crisis.

Friends with money

If the loan avenue continues to be closed to you, you may want to try some alternative strategies, says Louis Dienes, a partner with the Los Angeles law firm of Jeffer Mangels Butler & Marmaro. "Many start-up companies are boot-strapped, relying on personal savings, bank card debt, and other personal resources, including sweat equity—doing for themselves 'by the sweat of their brow' what they might pay others to do if there were better first sources of outside investment capital," he says.

You might also make the rounds of your friends and family to see if any of them are willing to invest in your business aspirations. Other sources of capital include strategic investors (, 7/2/08) Dienes says, who may be larger companies in the same industry or customers and suppliers of the existing business who have an interest in ensuring the company's survival as a means of advancing their own business strategy. Another possibility is that the seller of the business may be willing to take a small down payment and fund the bulk of the sale over a period of years.

Janis Machala, founder of consulting firm Paladin Partners, suggests that you ask well-connected colleagues and professionals such as your banker or lawyer to introduce you to individuals who might be willing to invest some seed money in your venture. "Meeting with other entrepreneurs in your town who have previously raised money can be useful, as they will know investors" to whom they can introduce you, she says.

Factoring option

If you can scrape up enough money for a down payment but can't get much funding beyond that, and if the company has business-to-business commercial invoices, you might use factoring to fund your initial operations. "Unlike a bank where a small business goes to get a loan, we don't care whether the client has poor personal credit, is profitable, is new, or is growing fast," says Brad Bernstein, president of Anchor Funding Services.

Factors buy outstanding commercial invoices from firms at a discount, then collect the payment and send the balance to the company, minus their fee, which ranges from 1% to 5%, Bernstein says. It's a way for companies to boost their cash flow by getting paid for accounts receivables immediately, rather than waiting through a typical 30- or 60-day billing cycle.

While factoring was used traditionally in the garment industry, Bernstein says his firm now finances product and service companies in all sorts of industries, including IT, staffing, manufacturing, and security. "As long as we can verify that the service was performed and that the invoice is good, that's what we're looking for," he says. "We even work with not-for-profits that get paid by the government and can't wait to get their checks from the county."