Rising to the Challenge: Starting a Business After Bankruptcy

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Yes, bankruptcy can affect all aspects of your life even after your bankruptcy has been discharged or your repayment plan has been finished. If you have declared bankruptcy, you have probably learned that taking risks with money or borrowing too much can lead to difficult times. Starting a new business is definitely a new venture in life that could yield many possibilities, but you should be aware of the risks first.

How to start a business after bankruptcy

A lot will depend on your own personal situation. For example, if you had already started a business as a sole proprietor or a partner and that is what caused your bankruptcy, you may want to consider doing business in a different form or with different people.1 Make sure to avoid signing a personal guaranty so that you will not be taking business debt as your own if you start business as a corporation or a limited liability company.2 These business forms are separate entities from yourself, so if you run into personal trouble it does not necessarily mean that your business will go down as well.

Getting the Money

One thing is for certain: businesses need capital to get off the ground. Financing will be a little more difficult once you have declared bankruptcy, but it is not impossible. The best place to look for funding is from family and friends. You need to make sure you have a solid business plan and a business that does not require too much start up money up front. Businesses that are good in the low start-up cost arena include convenience services, consulting, and landscaping services.3

If you still need more money, you will need to convince lenders such as venture capitalists or angel investors. These investors will ask you questions about your business plan, how profitable the industry is, future projections, and what type of business you are going to run.4 You may also be able to get someone with good credit to co-sign on any loans you take out.5 You should be wary about taking out more debt than is necessary, though.

Small business administration loans are something you should be wary of. Lenders will often base the interest rate on your credit history and they may require you to secure the loan with collateral.6 Further, debt can pile up if you are not prepared enough to pay it back with a higher interest rate. One way to remedy this is to prepare a factual explanation on your credit report if you ran into some major life event like a car accident or an illness.7 A short explanatory statement about these events and how it caused your bankruptcy will give the lender more information about what happened and the lender may be more receptive to giving you a fair loan.8

An even better source of funding is business grants. As long as you demonstrate you have a solid business idea with a good return on investment and solid customer interest, you have a good chance of getting a grant.9

Staying Proactive

You need to make sure to keep good business records, pay all your business taxes, and be careful about what you say to your customers about payment terms.10 You should have your business planned out carefully with financial projections stretching into the future. If you are planning a business that requires a lot of inventory, you should make sure to maintain the right amount.

It may help to assemble a team of people who you trust and who have enough experience to bring to the table. Be careful about who you ask to join you and make sure to negotiate and write down what that person’s role and payment will be if they join your venture. You will also have to talk about how much control or ownership your team members will have in light of any investor ownership as well. The important thing is to maintain good business records in all aspects of your business. As long as you stay on top of things, you should be able to start down the path of opening a business in the aftermath of bankruptcy.

Find out about starting a business after filing for bankruptcy by the bankruptcy attorneys at Ariano & Reppucci, PLLC.

[1] Patricia Dzikowski, Starting a New Business After Bankruptcy, nolo.com, http://www.nolo.com/legal-encyclopedia/starting-business-after-bankruptcy.html (last visited Jan. 7, 2015).

2 Id.

3 Lee Nichols, How to Start a Business After Chapter 7 Bankruptcy, smallbusiness.chron.com, http://smallbusiness.chron.com/start-business-after-chapter-7-bankruptcy-16610.html (last visited Jan. 7, 2015).

4 Id.

5 Id.

6 Hari Ender, Can I get a small business loan after bankruptcy?, nolo.com, http://www.nolo.com/legal-encyclopedia/get-small-business-loan-after-bankruptcy.html (last visited Jan. 8, 2015).

7 Id.

8 Id.

9 Wade Nehmbhard, Running A Startup Business While Filing Personal Bankruptcy, entrepreneurrookie.com (July 21, 2011), http://www.entrepreneurrookie.com/blog/running-a-startup-business-while-filing-personal-bankruptcy/.

10 Pattricia Dzikowski, supra note 1.