5 Steps to Bounce Back From Bad Credit and Bankruptcy

Having bad credit, no credit or a personal bankruptcy filing doesn’t have to put a damper on your business dreams. Learn how you can bounce back.

How much of a handicap is it to start a business with bad credit or no credit, or even after filing for personal bankruptcy? Understandably, startup entrepreneurs and even more established business owners worry about how long hiccups in their personal credit history might weigh down their entrepreneurial potential.

Here’s the good news. While most personal credit scores take a big nose dive after a bankruptcy filing or other financial mishap, they can steadily improve over time. This means that credit-challenged entrepreneurs don’t have to wait 10 years to become creditworthy again. The trick is knowing what to do and when to do it.

Here are five easy credit restoration recommendations for business owners:

1. Obtain a microloan. Business on Main readers know that I’m a fan of microloan organizations. These entrepreneur-friendly lenders, available in all 50 states, tend to be more understanding toward entrepreneurs with no credit history or a bad credit history.

Further, they price their credit products below the rates of most personal credit cards and “professional” small-business credit cards. Loans can be as little as $500, which is a manageable, fast way to turn around a negative credit score. Even better, microloan organizations can increase a borrower’s credit line to keep pace with business progress.

2. Manage credit reports. Bankruptcy laws have changed in recent years. In general, a Chapter 13 bankruptcy filing, which usually involves a repayment plan, can be reported for up to seven years. A Chapter 7 bankruptcy filing can be reported for up to 10 years.

Bankruptcy courts don’t directly report bankruptcy information to credit bureaus. It’s up to the individual to submit information to the three major credit bureaus to correct misrepresentations of a bankruptcy filing, report the successful repayment of Chapter 13 obligations, or remove an item entirely after the reporting term has expired.

3. Minimize the need for debt. Entrepreneurs with bad credit or no credit should favor starting businesses that don’t require sizable up-front cash requirements. For example, it’s much more capital intensive to start up a restaurant than a catering business.

Active business owners can also favor business strategies that conserve a company’s cash flow while still aggressively pursuing revenue growth. While the knee-jerk reaction of most first-time entrepreneurs is to try to do everything, partnerships with other businesses can help young companies share the costs of new market entry. Of course, licensing of intellectual property assets is a productive way to generate revenues with nominal up-front and ongoing cash requirements.

4. Change your business structure. Businesses that are organized as sole proprietorships will always struggle to separate the founder’s personal credit from the company’s credit. Through a corporation or limited liability company, new businesses and existing businesses can steadily establish a separate credit identity that also protects the founder’s personal assets from professional liabilities.

5. Reduce the costs of new customer acquisition. Business owners can spend a lot of money marketing their companies and not generate a positive return on invested capital. The less owners have to spend to generate a customer, the greater the company’s overall cash flow — which is the secret to reducing dependence on lenders for business financing.

To track progress, owners should develop quantitative metrics to monitor sales and marketing costs and learn exactly what produces a profitable customer relationship. With close attention to these metrics it’s easy to eliminate “nice-to-have” cash expenditures.

Last year I coached a desperate business owner who had just about exhausted all of his personal resources to cover his company’s payroll. To preserve cash in a dramatic way, I encouraged him to cancel all online and offline marketing activities and rely only on direct cold calling and referrals from existing customers to solicit business. The tactic worked. It was also eye-opening to the business owner, who realized that he really didn’t have to spend so much money to make money.

Dealing with adversity

There is another factor I’ve found that affects the business performance of entrepreneurs who’ve suffered significant personal financial setbacks: Their self-confidence may not bounce back as fast as their credit score.

Adversity is not the same thing as failure. When business owners acknowledge this important difference, they are ready to explore new opportunities again with a smile on their face. It’s magical.