Alternative lenders have a mission to make it easier for you to secure loans to launch and grow your small business. However, it can be more difficult if you’ve had past experiences that become business loan legal issues today, such as bankruptcies or a criminal history.
Here, you’ll learn what you should expect and strategies to better prepare you during the business loan process if you’ve had these types of challenges in the past. This will help you set realistic expectations of the business loan process because your potential lender has to clearly assess your situation to decide the overall impact of any bankruptcy or criminal records on your loan application.
How do past legal issues impact a loan application?
While past legal issues will likely impact your loan application process and could bump you out of eligibility for some lenders, it’s important to know that this isn’t the case for all lenders.
Conventional lenders
Most conventional lenders include banks or credit unions. It can still be challenging for you to meet all of their lending criteria, even without past legal issues, and adding a bankruptcy or a criminal history can make it even harder.
Here’s how conventional lenders could consider a past challenge of yours:
Bankruptcy: A prior history of bankruptcy causes concern, simply because it demonstrates that you’ve had a history of not paying obligations as agreed. If your credit has been in good standing since the bankruptcy, you may still be able to secure a business credit card, line of credit, or a loan from a bank.
Criminal history: Having a criminal record does not automatically disqualify someone from loan eligibility, but it can make it more difficult. That’s because one of the lending criteria often used is “good character” – and some banks could determine that your past reflects negatively on your character. For this reason, and because circumstances vary from applicant to applicant, each application must be considered on a case-by-case basis.
Alternative lenders
This group includes community development financial institutions (CDFIs) and certified development companies (CDCs). These are non-profit lenders that are approved by the U.S. Small Business Administration (SBA) to offer their loan options. There are also some credit unions and many online lenders who are also considered alternative lenders.
For alternative lenders, every applicant will be reviewed and considered individually. Here’s how alternative lenders could consider a past challenge of yours:
Bankruptcy: While financing from an alternative lender can offer more lenient credit or cash-flow requirements, it comes down to the individual lender. Some lenders can require that borrowers do not have bankruptcies on their records. In other cases, a past bankruptcy won’t bump you out of consideration for specific loan options if you meet the rest of the criteria.
Although a past bankruptcy doesn’t completely remove you from contention, you must explain what led to your bankruptcy filing. You’ll have to explain what the credit obligations were, including who the money was owed to, the amount, and how it was settled. Lenders need to understand the details surrounding your bankruptcy before making any credit decisions on your loan request. If your previous bankruptcy was to the government, you could be automatically ineligible for any future government guaranteed loans, including the SBA.
Criminal history: The SBA recently revised its rule regarding criminal histories and incarceration to make it easier for you to access financing. However, a criminal record can still negatively impact your ability to receive a small business loan. Your lender would need to understand the nature of your criminal history and the status of any parole or post-sentencing requirements that you may be serving before coming to a decision.
If you’re in this situation, have a conversation with a CDFI or CDC that serves your geographic area to find out how your particular situation could potentially impact your loan application. In some cases, as long as the situation is resolved in accordance with the law, you can still receive a loan approval if you meet the rest of the criteria.
For additional help, there are organizations and programs that can act as resources for convicted felons. After someone serves their sentence, these organizations can help you better prepare to move forward.
How to prepare and present the strongest case for your small business loan approval
When business loan legal issues impact your life, it doesn’t mean that you shouldn’t try to get financing from a reputable and responsible lender. It does, however, mean that you need to be prepared to discuss your history with your potential lender.
Remember, you’re asking a lender to trust you with their funds, so you’ll need to prove that you’re a trustworthy borrower. If you’ve had legal or financial issues in your personal or professional history that resulted in a bankruptcy or a criminal record, being honest about your history and current status will help you and a potential lender establish a more trusting dialogue and relationship.
Here are a few additional tips to help you:
- Rather than wait until you’re ready to launch a business, start exploring your financing options and begin conversations with potential lenders as soon as you have a basic business plan to support your idea. That way, you can build a relationship well before you need financing. This will give you a better sense of your options so that you don’t spend time seeking assistance from lenders who won’t be able to help.
- While a previous bankruptcy or a criminal history can be a negative factor, it’s one of many that a lender will consider. If you explain your past history and share what you learned or changes you’ve made, this could help turn a potential decline into an approved loan request.
- To help build your case, you’ll need to provide proof and documents. This includes court documentation related to your conviction or bankruptcy. You may also have to request documents from your attorney and the courts.
- Be prepared to hear ‘no’ from some lenders – but also remember that you only need one good ‘yes’ to get the financing you need. Work hard to establish open and honest communication with the right lender, and you may be pleasantly surprised by their decision regarding your loan request.
Beware of predatory lenders who may take advantage of your situation
Out of discouragement or need, you may fall prey to predatory lenders – those who don’t have your best interests at heart. This can happen to any business owner, but if you’re facing a past legal issue, you could be more vulnerable to these lenders. That’s because many of the barriers to responsible financing seem to be removed at the outset. For example, irresponsible lenders may offer financing with no credit check or without running a criminal record history.
The problem is that these loans often come with exorbitant interest rates and extremely difficult repayment terms. Be aware that these kinds of “lenders” are out there and please, stay away. Eventually, you’ll find other and better options.
Pursuit has financing options available to help your business grow
Pursuit helps small business owners in New York, New Jersey, Connecticut, Pennsylvania, Illinois, Nevada, and Washington to get the financing needed to grow their businesses. We look at the bigger picture of where you’ve been, your current situation, and your long-term aspirations. We’ve also helped people who have experienced past business loan legal issues, too.
Contact us today to talk through your unique circumstances.
