Does Filing for Bankruptcy Hurt You if You Are Starting up a Business?
Filing for bankruptcy can certainly hurt if you are starting a business, but there are so many variables that a hard and fast answer is difficult. A bankruptcy can be devastating to your business start-up if you need business loans and banks are requiring you to submit to a credit report as part of the process. On the other hand, a bankruptcy may be no problem at all if you are starting a small home-based business using cash.
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Personal Guarantees
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Banks loaning money to small, start-up companies almost always require a personal guarantee from the owner. That means if the business fails the owner remains personally liable for the debt. The bank can require the personal guarantee even if the business is structured as a limited liability company. LLCs allow a business to operate as an independent entity, but few, if any, banks would offer a significant loan to a brand-new LLC without a guarantee or collateral. With a fresh bankruptcy on your credit report, you simply will not qualify for a business loan.
Court Approval
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Your finances and spending are strictly control by the bankruptcy court once you file for bankruptcy. It is highly unlikely that the court will allow you take on additional debt to finance a start-up business until your bankruptcy is completed.
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The bankruptcy will also hurt if you are trying to attract co-owners or investors. Potential partners are looking to invest as much in you as they are in the business. They want to follow someone with a track record for success, and your bankruptcy could cause them to question your leadership or financial management skills. Such a perception could make it difficult for you to raise money from investors or even friends and family.
Making Choices
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Recovering from a bankruptcy while starting up a business is a lot to take on at one time. It may be that you're unable to find a job for whatever reason and you need to start a business to generate some income. But if you are employed, you may want to consider letting some time pass before starting up the business. Successfully completing your bankruptcy and repairing your credit could put you in a better position to start a business some time later.
Silent Partner
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If you must start a business while in bankruptcy, opt for a small business that you can operate out of your home. Consider a business that you can operate using existing resources, including your home computer and Internet connection, along with reliable transportation to make any necessary sales calls for your service or product. Or become a silent partner with another entrepreneur in a business. Allow your partner with great credit handle bank loans and fund-raising while you focus on the product. Then you can think about striking out on your own after your bankruptcy is complete and your credit has recovered.
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