- Being in debt doesn't necessarily mean you can't start your own business.
- Would-be business owners with significant personal debt can look to alternative lenders as well as friends and family, angel investors, microlenders, crowdfunding and grants.
- Reducing personal expenses, taking on a side hustle, and carefully planning how to invest borrowed funds are some important steps in starting a business with debt.
- This article is for individuals who carry personal debt but want to start a business.
Depending on where you are in your life and your career, you might be facing a little – or a lot – of personal debt. Many would-be entrepreneurs owe money on credit cards, student loans, mortgages, and/or cars, and these heavy outstanding balances could put their dreams of business ownership on hold.
Though quitting your day job to start a business when you're thousands of dollars in the red is ill-advised, debt shouldn't prevent you from getting your business going. Although it's not an easy path, it is certainly possible to become an entrepreneur under tough financial circumstances.
If you're in debt and looking to start a business, you can take these seven steps to minimize your startup expenses and keep your cash flow steady:
- Explore formal financing options.
- Look for a cash-ready partner.
- Consider other sources of funding.
- Make a plan for your borrowed funds.
- Reduce personal expenses where you can.
- Find a side hustle.
- Don't rush into it.
- Reinvest in your business.
Here is more information on each step of the process.
1. Explore formal financing options.
If you're carrying a lot of personal debt, your monthly cash flow is probably not optimal for funding a business. There are some options for business owners in your position, including alternative lenders and credit card financing. However, each comes with pros and cons, and you should thoroughly understand what's involved before moving ahead.
Ethan Senturia, a partner in business advisory firm Greendoor Partners and author of Unwound: Real-Time Reflections From a Stumbling Entrepreneur (Blackbird Ventures, 2017), said affordable financing options, such as loans and lines of credit with low interest rates, almost always require a personal guarantee from the business owner.
"Even though you can get a business loan with a heavy personal debt load, most small business lenders will ask that you personally guarantee repayment of the loan in case your business can't make the payment," Senturia said. "This could add a heavier burden on your already-heavy debt obligations and could add stress to your personal life. Financing that doesn't require a personal guarantee ... is very expensive and can significantly strain your new business."
You can also probably secure additional personal credit cards for your business, but Senturia doesn't recommend this, as these cards will not help you build business credit. Instead, they will hurt your personal credit. [Read related article: Small Business Financing Options That Bypass Traditional Banks]
If you go with a loan, do some research to decide if a revenue-based or cash flow lender would be better for your business. Revenue-based lenders, also known as subprime lenders, care more about your business revenue and personal credit score than your personal debt. Senturia noted that these lenders are often quite expensive but less stringent in their underwriting. Cash flow-based lenders, on the other hand, will look at your business's ability to pay your business debt from your cash flow, including your personal living expenses and debts, he said.
"Cash flow-based lenders will also consider outside personal income as a positive addition and will give you credit for this in their cash flow equation," Senturia said. "Since many business owners rely on the business to cover their personal expenses as well, the impact of personal debt loads oftentimes will be factored in."
Key takeaway: Financing options for aspiring business owners with significant debt include loans with a personal guarantee, business credit cards, and loans from cash flow-based and subprime lenders.
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2. Look for a cash-ready partner.
You may not have the money to bankroll your business right now, but someone you know might. Leslie Tayne, a financial attorney, debt therapist and author of Life & Debt: A Fresh Approach to Achieving Financial Wellness (Gateway Bridge Press, 2015), said finding someone with a ready cash flow can help you get more accomplished sooner. She suggested turning to a relative or friend to borrow money.
"If you want interest-free cash and are confident that you will have success from your business, then ask a family member [or friend] to give you a loan," Tayne said. "I don't always recommend [it], but in this situation, you can consider it and have a time frame set in when you can pay them back."
You might also see if family members and friends are willing to invest in your business, said David Walter, CEO of Electrician Mentor. If you go this route, be sure to make it a formal process. When Walter took this approach, he drew up a written formal agreement with each investor to avoid conflicts and potentially damaging arguments – or worse – down the road.
"All of my agreements [included specifics on] how much money was invested and what rate of return was expected," he said. "Overall, it turned out to be a very positive experience."
Another possibility is finding a business partner. However, only take this approach if you're willing to cede some control of your business.
Matt Scott, owner of Termite Survey, said it's best to hire an attorney to develop a partnership agreement that includes an "exit plan for the relationship," along with financial details, expectations, and a specific breakdown of who will control which aspects of your operation. [Read related article: The Pros and Cons of Business Partnerships]
Key takeaway: Getting a loan from a friend or family member and finding a partner are viable alternatives to funding a new business with a bank loan or business credit. These options require a detailed written agreement.
3. Consider other sources of funding.
Even if you do secure a monetary loan from a friend or family member, or persuade someone to partner up with you on the venture, you may also be able to get help from an angel investor. Angel investors typically offer capital for business startups in exchange for convertible debt or equity in the business. Many angel investors now belong to networks where they share investment capital.
Microloans – which usually range from $5,000 to $20,000 – are also worth exploring.
"Minority business owners, in particular, can qualify [for microloans] if they don't need a lot of money," said Ty Crandall, CEO and founder of Credit Suite. "These are often good loans in terms of interest rates."
The U.S. Small Business Administration offers the SBA Microloan Program. Loans available under the program carry interest rates of 8% to 13% and have a maximum repayment term of six years.
While competition for them can be fierce, you can also look into government grants and grants from local agencies. Crowdfunding, where you obtain smaller amounts of money from multiple people through an online platform, is another option.
Drew Page of business lending platform EquityNet said it is important to disclose your existing debts when you're raising money. You shouldn't try to cover them up.
"Transparency builds trust, and if investors conduct their diligence and discover you tried to cover up your debt obligations in order to raise funding, they'll almost certainly revoke [any offer]," Page said.
Key takeaway: Angel investors, microloans, crowdfunding and grants are alternative funding sources worth exploring.
4. Make a plan for your borrowed funds.
No matter how you intend to finance your business, it's critical to make a plan for how you will use the money, especially if you are looking for a loan, Senturia said. This plan should be detailed, but flexible enough to adjust as your financial situation changes.
"Don't borrow more than you need, and don't borrow without a specific use of funds," Senturia said. "Taking that money when you don't know specifically how it will make a profit for you isn't a prudent decision, and it may actually hurt your business more than it helps. Borrowing with a clear sense of purpose will give you the best chance to productively and successfully deploy your new capital."
Knowing exactly how you're going to use borrowed funds may even help you obtain a loan despite your debt. Josh Eberly, owner of 717 Home Buyers, said creating and sharing a five-year plan for how he was going to use borrowed funds was an invaluable strategy in procuring funds to start his business.
Key takeaway: Avoid borrowing more money than you need, and form a concrete plan for how you'll use the funds.
5. Reduce personal expenses where you can.
Entrepreneurship often means making personal sacrifices for the sake of your business, and money is no exception. Nicole Pomije, the serial entrepreneur behind NB Talent Services and The Cookie Cups, was carrying a lot of credit card debt when she started her first business. She soon realized it was necessary to cut down on her personal expenses to grow her company.
"When you are starting a new business, you are going to have a lot of expenses to consider, which can be harder when you are in debt," Pomije told Business News Daily. "By keeping your bills low, you will save yourself a headache and free up the extra cash you need to invest in the new business."
While Pomije relocated from notoriously expensive New York City to Minneapolis to cut down on her bills, there are some less drastic ways you can pare down your expenses. For example, smart meal planning can reduce your reliance on pricey restaurants and takeout food, and refinancing your car or home loans can lower your interest and payments. Eliminating or scaling back your use of subscription-based television services can also add up to significant savings, as can finding a cheaper mobile phone plan.
Key takeaway: Cutting personal expenses – even small ones – will reduce your debt load and make it easier to bankroll your business.
6. Find a side gig.
You won't get rich from a side hustle, but taking on one or more can help you reduce your debt faster and/or provide cash to fund your business, said Peter Koch, co-founder of DollarSanity.
Consider driving for Uber or Lyft or delivering food through services like Uber Eats and Grubhub. You could also register on TaskRabbit to provide busy consumers with services in more than 50 categories. There's a one-time $25 registration fee, but you get to keep all of your earnings.
Other side-hustle possibilities are child care, tutoring, pet sitting, freelance writing and web design.
Jessica Zweig, CEO and founder of personal branding agency SimplyBe and author of the upcoming Be: A No-Bullsh*t Guide to Increasing Your Self Worth and Net Worth by Simply Being Yourself (Sounds True, 2021), suggests depositing money from side hustles into an account that makes it difficult to access. This way, you will not be tempted to squander the money and can build up your wealth. "My accountant once said to me, 'Stack your cheddar,' and that's one of my favorite pieces of advice about opening an account and putting money where you can't touch it," Zweig said.
Key takeaway: A side hustle is a good way to chisel away at your debt and earn cash to invest in your business.
7. Don't rush into it.
Your business doesn't have to go full steam ahead right away. If you can't afford to go all out right now, start slowly, Pomije said. Get the ball rolling with small, inexpensive tasks that serve to establish your brand's presence.
"Create a logo, set up your social media accounts, [and] even buy the domain name for your business," Pomije said. "These are all things you can do at a low cost that will help get your new business up and running."
You can even start marketing your business with some creative, low-cost strategies. Tayne suggests personable, memorable and eye-catching social media campaigns.
"Images speak louder than words," she said. "Create a [visual] advertising campaign that makes an impression. This can be low in budget and gain you more clients."
Key takeaway: If you lack the funds to fast-track your business, engage in inexpensive initiatives, such as social media campaigns, to establish your company's brand.
8. Reinvest in your business.
Although it may be tempting to use your profits to pay down your personal debts, Tayne said your business's growth needs to come first.
"Don't spend the money you make right away," she said. "Invest your profits back into your business before paying off any debt. This is crucial and will keep your business going – it will also save you in the future. Wait until you are making a steady profit. Then you can put more money towards your debt and spending."
Key takeaway: Reinvesting money in your business, rather than paying down personal debts, is a must for your business's long-term growth.
For more tips on managing your business finances, visit this Business News Daily guide.
Julie Ritzer Ross contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.