Though the Biden Administration has moved to forgive hundreds of millions of dollars in student loans, student loan debt promises to linger for years for many, with repayment taking anywhere from 10 to 20 years. This is an especially heavy weight for entrepreneurs. What can be more frightening than starting a business with student debt hanging in the mix?
The thought of taking on additional personal and business loans is a pretty unnerving prospect, particularly when you already owe thousands of dollars before you file for an LLC. Getting approval for a small business loan with existing debt is another matter entirely.
Statistics tell the story of how much debt is out there:
- Up to 43.4 million borrowers collectively have over $1.73 trillion in student loan debt
- As of 2023, 7 million borrowers owe less than $5,000, totaling $18.90 billion in debt
But the good news is that it’s possible to fund a business when you have student loans. Balancing student loans and business debt is a delicate process, but by taking the right steps and avoiding common pitfalls, you can grow your business even with some lingering student debt.
Consolidate your loans
If you have several student loans, consider consolidating them into a single loan. Instead of paying several lenders at once, each receiving a different amount of money at a different interest rate, you can bundle all of these payments into one account (and pay one interest rate).
Debt consolidation is an easy process, and just about every lender does it. So long as you’ll end up paying less interest over time (i.e. your pre-existing terms would cost you more than the terms of the consolidation), you can end up ahead of the game. You’ll have fewer debtors and, depending on your personal circumstances, may even pay off your debt faster. Just be sure that student loan consolidation doesn’t interfere with any federal debt loan forgiveness programs.
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Pay off your student loans on-time and quickly
This one might seem self-evident, but it’s crucial to pay back your student loans on time. If you don’t, your credit suffers. And if your credit suffers, it becomes harder and harder to land a business loan. Banks want to lend money to people who have an established track record of paying back what they borrow, and want to see that they do so on-time and on-schedule. Late payments signal that you can’t handle your debts, which is a major red flag for most banks.
You might not expect personal credit and business credit to impact one another, but they share a ton of overlap. Early-stage businesses rarely (if ever) have a credit history of their own. Instead, often banks make their business loan decisions based on the personal credit history the applicant. Lenders are more likely to reject your company for a loan if you have red marks on your credit score, so be sure to pay your bills on time.
Find the right business loan for your needs
Not every small business loan is the same. Some are harder to get based on the amount of money at stake, others because of how you can use them. Thankfully, there are several types of small business loans out there, and each offers a specific benefit based on the reasons you’re borrowing money in the first place. The trick is finding the right small business or startup loan for your needs.
Small Business Administration (SBA) Loans
Small Business Administration (SBA) Loans help many entrepreneurs get access to the financing they need by guaranteeing up to 85 percent of the value of a loan. This means that the SBA promises the lender that it’ll pay up to a certain amount of the loan’s total if the lender cannot do so itself. Banks get a guarantee that they’ll recover at least a portion of their loan, and borrowers get access to low-interest loans that they may not have been approved for otherwise.
Equipment Loans
Equipment loans are a great option for entrepreneurs who need financing to help buy machinery and equipment for their company. These loans are particularly helpful for entrepreneurs with student loan debt, as they’re less strict with creditworthiness and don’t require additional collateral. These loans are self-collateralizing, which means that the bank will seize the equipment you purchase with the loan if you can’t continue to make payments. You’ll get the machinery you need without tying up cash or other assets as collateral, and won’t get tripped up by strict credit requirements.
Short-Term Loans
Short-term loans can be a good option for businesses that need quick access to capital for one-off projects, and who can afford to make daily or weekly payments in return. Short-term loans tend to have less strict credit requirements, but also come with higher interest rates than long-term and SBA loans. They’re not great as a consistent lending option, but can do in a pinch if there aren’t other options on the table.
Low (Or 0 percent) Intro APR Business Credit Cards
If you’re up-to-date with your student loan payments, your credit score is likely to be in decent shape. After all, credit agencies love it when people have a long history of paying back debts on time. So if this is true for you, odds are that you may be a good candidate for a business credit card with a low (or 0 percent) introductory APR. These cards can function as a no-interest loan for big purchases, or a no-interest line of credit for smaller and periodic purchases. You’ll stay in good credit shape so long as you pay off your debts before the introductory APR period expires, and will build your company’s credit history along the way.
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Invoice Financing
Not every kind of loan hinges on your business and personal credit. Some loans, such as invoice financing, can help you fund your business whenever cash might be tight. Invoice financing allows business owners to use the sum of their outstanding invoices to act as loan collateral. This means that you can hand over the invoices your customers owe in exchange for a percentage of the total value of the invoices themselves. Bear in mind that invoice financing won’t work for you if you don’t invoice customers as part of your business.
Build your business credit history
The sooner your company builds up its own track record with borrowing and making money, the sooner lenders can evaluate business loan decisions on your company’s own merits. The long-term goal here is to have your company’s credit history be extensive enough to give lenders all the information they need when you apply for financing. The longer your history, the less that banks will have to make their decision based on your personal details alone. Be sure to monitor your business credit often, and build up a credit history as soon as you can. This may not help you in the short-term, but it will set you up for long-term lending success.
Funding a business can be a nerve-wracking prospect for any entrepreneur. If you have student loan debt, the idea of taking on even more loans can seem downright crazy. But not all loans are the same, just as not all debts are the same, either. So long as you’re doing a good job of paying off your student loans and don’t have a ton of personal debt, you may still be a good candidate for business financing. And, the sooner you can get your company’s credit history to stand on its own, the sooner you can separate your personal and business finances in the eyes of your would-be lenders.
This article was originally published in October 2018.
