Pin Me

Opening a New Business After Bankruptcy

written by: William Busse•edited by: Michele McDonough•updated: 3/18/2011

A business or personal bankruptcy can present many unique challenges and impediments to opening a new business. However, by maintaining strict financial discipline and following a few proven strategies, the business owner can attain success and substantial financial reward.

  • slide 1 of 5

    A Bankruptcy Overview

    Opening a new business after bankruptcy presents several unique challenges that are not usually considered in a traditional start up. It is important to address the complexities and potential pitfalls of the process to ensure the maximum potential is gained from the venture while avoiding complications.

    Although the setback of a bankruptcy can discourage many promising entrepreneurs, it is important to remember that the rewards from opening a new business after bankruptcy can be very lucrative. Although the process will be difficult, if the necessary effort is applied to the task, success will inevitably follow.

  • slide 2 of 5

    Personal Considerations

    Bankruptcies occur for very specific reasons. It is important to determine the root cause of the bankruptcy and develop strategies to exhausted businessman avoid any chance for a recurrence of the debt problem. This should include comprehensive personal debt counseling to understand the proper way to handle income and expenses.

    Operating a business requires even greater financial discipline than personal finances. It is critical that the new business owner understand how to read and interpret a financial statement and balance sheet. The Small Business Administration (SBA) offers counseling and publications that provide extensive education on business financial matters.

  • slide 3 of 5

    Steps to Ownership

    Recognizing that inattentiveness to financial details was probably the root cause of the bankruptcy, it is important to develop a comprehensive business plan to identify true costs and potential obstacles to success. A well written business plan includes elements such as:

    * Purpose Summary: This provides an explanation of the business, its mission statement and other critical information that outlines the essential functions of the business.

    * Key Personnel: Identifies who will be filling specific roles that will drive the business.

    * Identifying Markets: The definition of the market area, its demographics and strategies for identifying opportunities for business growth.

    * Products: Defining the essential objective of the business in terms of the products and services it will provide.

    * Budget and Financial Requests: The Budget provides a financial blueprint which identifies overhead and the sales and profit margins required to meet it. By generating a realistic budget, logical funding requests can be developed while allowing a potential lender to make a judgment that is based on the soundness of the business plan.

    Developing a budget is a bottom up process that starts with the identification of actual expenses. This will include items such as rent, utilities, salaries, insurance, taxes and any other identifiable expense that is a financial requirement to operate the business. Thoroughness in recognizing true costs can not be overstated.

    From the cost assessment, the entrepreneur can then produce the monthly sales required to meet overhead and generate a profit at a given profit margin.

  • slide 4 of 5

    Credit and Financial Challenges

    Acquiring credit will prove to be difficult for a new owner in the event of a personal bankruptcy or a previous business bankruptcy. Banks and commercial lenders are very reluctant to lend on new ventures, particularly if the owner has degraded credit.

    It is also difficult to establish credit with vendors who often require personal guarantees as a prerequisite for establishing a new credit account. However there are certain strategies that can be used to mitigate these challenges:

    * Establish a relationship with the SBA: The SBA does not generate business loans, but will guarantee them. By working with the SBA to develop a business plan and budget, it may be possible to secure a loan with their backing.

    * Seek out vendors who are eager to find for new business opportunities: Present the business plan and budget to targeted vendors and provide an explanation of the bankruptcy. Try to establish a small line of credit initially and use it to demonstrate financial responsibility.

    * Consider a home based business: Home based businesses require substantially less start up capital. The home based business market offers a multitude of opportunities as businesses look to outsource wherever possible.

  • slide 5 of 5

    Stay Confident

    A bankruptcy is a temporary event that defines the past, not the future. It is important for the entrepreneur to stay positive and continue to look for opportunities that will provide the pathway to success.