|
Small-business borrower must overcome
bankruptcy
Dear
Small Biz Adviser:
If I have recently
been discharged from bankruptcy Chapter 13 (with school loans still
on my credit report). what are my chances of getting funding for
a small business? Now that my Chapter 13 is over, what should be
my first step toward getting my credit acceptable to a potential
lender?
Dear
Angela:
You certainly
have picked a very difficult moment to fund a small business. For
the benefit of all our readers, Chapter 13 bankruptcy is for individuals
and married couples seeking arrangement through the court to develop
a plan for repayment of debts based on income. You protect your
property, but will likely lose a good credit rating.
In your case, congratulations
are well deserved. Unfortunately, too many individuals and married
couples take the route of Chapter 7 to dissolve all the debts, using
unsecured assets to liquidate the indebtedness. That typically results
in creditors not getting back the full amount owed them. In turn,
society receives the impact of that action in the form of higher
prices on future purchases. Creditors increase prices to offset
loses, or take a "bad debt" deduction against net income before
income taxes.
Regardless, in your case
the timing could not be worse. As you are likely aware, the economy
-- or at least many sectors of it -- have taken a turn for the worse.
Housing starts, manufacturers' inventories, employee layoffs and
so much more have sent a ripple through the economy that is now
touching the banks. The most recent Federal Reserve Board bank survey
report indicates:
- Lending standards are
being tightened as a pace last seen during the 1990-1991 recession.
- Higher interest rates
are being charged to riskier borrowers.
- 60 percent of domestic
banks surveyed have tightened lending standards for large and
medium businesses.
- 45 percent of those same
banks have tightened lending standards for small firms.
- There are more restrictions
on consumer loans.
These trends do not bode
well for you. Granted, you did not abandon your indebtedness, but
a Chapter 13 proceeding and the trends noted above will not help
your cause.
The only option, if you are
not able to secure a bank loan, is to seek outside investment. Your
options include:
- Family and friends. I
always caution my clients to treat such indebtedness as if it
came from a bank. You do not want to endanger those relationships.
- Potential partners, though
eating into personal profit margins and control of the venture,
can offer the capital and other resources. Having another person
equally concerned for the success of the venture can open more
avenues to resources and potential sales.
- Venture capital is still
reeling for the dot-com losses of 2000. And it is widely reported
that many VCs are opting to nurture existing investments as opposed
to new opportunities. Where new opportunities are considered,
the projections must show a more substantive and timely arrival
of earnings. Further, VCs do not invest in just any type of venture.
I do not know the nature of your business, or whether it is a
startup or an existing concern. Therefore, it is not possible
to convey any opinion in that regard.
The last alternative, though
not attractive to assertive entrepreneurs, may be the wisest options.
Simply wait for the opportunities to improve. There is uncertainty
in this economy at the present time. In most cases, that also impacts
marketability of your product or service. Consumer confidence is
not high. Until the uncertainty dissipates it may be better to wait
than to move forward.
Regardless of your decision,
I wish you well.
Bankrate.com writers base their answers on our editorial
content and advice of financial professionals. We make no claims
or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content,
advice and answers are intended only to assist you with your financial
decisions. However, by its nature such information is broad in scope.
Your financial situation is unique, and our content, advice and
answers may not be appropriate for your situation. Accordingly,
we recommend that you get different opinions and seek the advice
of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
|
