We are often asked if starting a small business can be achieved if the owner has the weight of personal debt weighing heavy on their shoulders. Should one dive deeper into debt to start a business that could be their means to climb out of it? Or should they pay off their debts first before jumping off the deep end?
All businesses require funding to get off the ground—even bare-bones, single-person startups. And a cocktail of poor credit and debt can hinder the financing process to start a small business.
“Starting a business is part of the American Dream,” says Howard Dvorkin, serial entrepreneur and chairman of Debt.com, “but that dream can be hindered if you’re facing challenges with personal debt. It’s not impossible to start a business while you’re in debt, but it’s a risky situation for you and your fledgling company.”
This guide will help you find solutions to pay off personal debt so you can start your business on solid financial ground. We also provide options for funding the business that doesn’t rely on your personal credit so you can realize your dream while you get out of debt. If you have questions or would like a free debt evaluation to find the best solution for you, call .
Table of contents:
Dealing with personal debt before you start a business
Jilliana Ourth, Debt.com Journalist: So you’re thinking about starting a small business… while there’s a lot to consider, one expert who has started no less than a dozen businesses says there’s something major most entrepreneurs forget…themselves.
Howard Dvorkin, Debt.com Chairman and CPA: Entrepreneurs tend to fixate on their business plans and their financial statements, but they often neglect their own personal financial statements. I’ve been a CPA and a financial counselor since before the millennium, and I can tell you: If you can’t manage your own money, it’s very unlikely you’ll be able to manage the money of your new business.
Ourth: Today we’ll dive into why experts, like serial entrepreneur Howard Dvorkin, recommend you get rid of debt before starting your small business and how you can make it happen.
But what if you don’t want to wait until your personal finances are in order? Can you still start a successful small business? We’ll talk about that too.
Now let’s dive into the facts:
Ourth: 76 percent of entrepreneurs use personal savings to finance their small business according to Bank of America’s 2016 small business owner report.
And their 2021 report revealed, 48 percent of business owners tapped into their personal savings just to survive the pandemic.
Dvorkin: A pandemic is just a very tough time to not only start a business, it’s a terrible time to try to seek funding for that business. Even before the pandemic, almost every entrepreneur I’ve ever known has kicked in some of their own money. You sort of have to, because if you’re supposed to convince others to invest in you, you should be putting your own money there too.
Ourth: Something to keep in mind: It takes, on average, two to three years to make a business profitable. The reason is simple. You spend a lot before you earn a lot. First, there are start-up costs, like equipment and permits and even office furniture. Then there are those continuous expenses like marketing, rent, and loan payments.
So those who enter the new business venture with a lot of funding and low expenses will be profitable quicker than those who have high expenses and very limited funds.
With no profits coming in, it’s better to rely on personal savings, than to dig the hole deeper by taking on additional funding from outside sources.
Dvorkin: When I started my first business in the 1990s, I was careful about every dollar. I didn’t want to be beholden to anyone, so I started at my kitchen table, and then from there, I moved into my first office which happened to be a converted janitor’s closet. I had no debt and some savings, and I knew that it would take years before I turned a very healthy profit.
I definitely don’t believe in ‘faking it till you make it.’ That’s kind of stupid. That can lead to wasting money on fancy offices, office furniture, and lavish business expenses that others may think that you’re more successful than you are. That feeds your ego, but it really bleeds your bottom line.
Ourth: Sure, you can try to get rid of the debt yourself, but why not save yourself the trouble of calculating the fastest route to take, when experts like those at Debt.com can direct you to the people who can give you turn-by-turn instructions.
Debt.com is a consumer website where you can find help with credit card debt, student loan debt, tax debt, credit repair, and more. Our experts work with vetted and certified providers that can give you the best advice and solutions to manage your debt.
Realistically, depending on various financial factors, becoming debt-free can take some time. But starting off your new business venture with thriving personal finances will help you out in the long run.
But let’s say you don’t want to wait. You have debt and bad credit, but you also have this amazing business idea you can’t wait to bring out to the world. Can you still start a successful small business even though you have debt and no personal savings?
Dvorkin: If you’re overwhelmed by personal debt, handle it like you handle your business: Seek out professionals. There are experts who specialize in quickly reducing your personal debt, using proven techniques like debt settlement or debt management.
I built Debt.com to do just that. You’ll get a free debt analysis with just one phone call. You’ll speak to a debt expert who will drill down on the details.
But, if you want to move on a business idea right away, there are alternative lenders, but be very very careful.
Ourth: If getting a loan from a traditional bank or credit union isn’t an option for you because of low credit score, there are still lenders out there who are willing to help.
Alternative lenders like online lenders, offer specific small business loans and cash options for those with bad credit. Like with any loan, there are risks you will have to be willing to take, like accepting high-interest rates or putting up collateral to name a few.
Dvorkin: There’s risk involved in any business loan, but alternative lenders narrow your opportunity simply because they charge so much. You might be better trying to crowdfund or asking a family member or even friends to invest in your idea – although I’ll warn you that family and friends must clearly understand the terms of their help. The last thing you want to do is fail at your business and fail at your personal relationships.
Ourth: Once you get the business running and have some revenue to present, more funding may become accessible to you.
But first, you need to get the funds to get your small business out into the world.
So, to recap, can you start a business with debt and no personal savings? It’s not recommended, but where there’s a will, there’s a way.
For more news and information subscribe to Debt.com’s YouTube channel and if you need help getting out of debt or have questions visit Debt.com today.
Generally, it is in best practice to pay off as much debt as you can before starting a business, particularly if you’ll be quitting your job or cutting your hours to focus on your new venture. Businesses can take over a year to show any significant profit. Meanwhile, you’ll be struggling to make the payments on all your debts, as well as all your other bills.
“Always choose to pay off loans first. All financial advisors will tell you to pay off debt as soon as you can because you could find yourself paying more in loan repayment than you do in any other purchase. If you’re already struggling to pay for basic purchases, wait until you’ve paid off more debt.”
EXPERT: Cliff Auerswald, president of All Reverse Mortgage, Inc.
That being said, it is possible to start a business even while you’re facing challenges with personal debt. Experts like Darren Nix, founder of Steadily Landlord Insurance, put this into perspective:
“It is possible to have high debt or bad credit and start a business. Same as how it is possible to be unable to ride a bike and fly a plane. People could start a business with that much debt, at best it will limit the person on how they start, at worst it is very unwise.”
EXPERT: Darren Nix, founder of Steadily Landlord Insurance
Solutions for dealing with student loan debt
Since student loan amounts and payment history are reported in your credit report, bearing the burden of student loan debt can be detrimental to business owners. You may find it more difficult to access business credit or to save enough funds to cover most, if not all, startup costs. And if you have struggled in the past to make payments, you may struggle as your small business tries to get off the ground. This is especially true for recent graduates facing hefty student loan debt. Starting a new business can be quite disheartening if a loan is declined because your debt-to-income ratio is too high. In order to gain the upper hand, one must first ask for a lending hand. Here are several options you may want to consider:
Individuals with federal debt are fortunate because they can sign up for income-based repayment plans. This way monthly payments become tied to income rather than student loan balances. If your business is your sole source of income and struggling to make any profit, your student loan payments could be as low as $0 a month. The downside, though, remains in that your student loan balance will grow. However, you are compensated with a little more financial flexibility.
Unfortunately, when it comes to private loans, lenders are less forgiving. The solution here is talking to your loan servicer about making the payments as low as possible. Although this may mean it takes longer to pay your loans back, which will also cost more in the long run, it does free up needed funds. Additionally, consider refinancing or consolidating your private loans.
Solutions for dealing with credit cards and other personal debt
Although credit has aided people’s ability to enhance their spending power, it has also led to a national average credit card debt of $5,315. Furthermore, lugging around debt with you into a new venture is never a good idea. Each credit card or loan carried over means one more bill to pay when you could be allocating your funds to your business.
Instead, focus on finding solutions to your credit card or loan debt through the following options:
Consolidating debt refers to any debt relief program that rolls debts into a single monthly payment. You pay off the debt you owe in full, but you minimize interest so it is easier, faster and more cost-effective.
The methods of consolidating:
- Balance transfer credit card: Usually balance transfer credit cards offer 0% APR (Annual percentage rate) during a set period between 12 and 24 months. This allows you to pay off your debt quickly and interest-free. You will need good credit to qualify for this option, so if you’ve managed to maintain your score even though you have high personal debt, this can be a viable option.
- Debt consolidation loan: This is a type of loan that offers a lower APR than you currently pay for your debt and the benefit of fixed monthly payments. You qualify based on your credit score, so you also need good credit to qualify for this option.
- Debt management program: This is a program offered by non-profit credit counseling agencies to help those struggling with large sums of unsecured debt, such as credit card debt. You consolidate debt into an affordable repayment plan and the credit counseling agency works with your creditors to minimize interest and stop penalties. The benefit here is that you don’t need good credit to qualify.
The benefit of debt consolidation is that it will combine all your debts into one payment, so you only have one bill to worry about. It also won’t damage your credit, which can be important as you work to get your business off the ground. The challenge is that you need a steady stream of income to make the payments on any debt consolidation plan that you use.
Another solution for debt is to settle debt for less than the full amount you owe. You agree to pay a percentage of the balance and the creditor agrees to discharge the remainder. While this can get you out of debt faster and allow you to save your funds for your business, the downside is the hit to your credit. Each debt you settle will result in a penalty on your credit report that lasts for seven years.
So, if you’ll be using your personal credit rating to apply for credit for your business, then it may be best to avoid this solution, if possible.
Get a free evaluation to find the best solution to get out of credit card debt.
How your credit can affect your business
Once your business gets up and running, it can have a credit score all its own. But when you’re just getting started, you may be using your own personal credit to get the business off the ground. That means your credit rating can significantly impact costs for your business.
It can be detrimental to businesses if the owner, has poor credit. You may struggle to get financing. What’s more, if you do get approved, the interest rates will be high. That means higher costs for the business as it pays off the debt.
“Would-be business owners should ask themselves if they can survive a few months of low revenue if their business doesn’t yield any profit in the beginning. Many businesses take several months to turn a profit. When you have savings, you can weather that storm, but if you already have shaky finances, throwing a new business into the mix can result in financial ruin.”
EXPERT: Jordan W. Peagler, Esq., partner and co-founder of MKP Law Group, LLP.
However, this does not mean that all hope is lost. Even if you don’t have good credit, there are other ways to fund your business that don’t rely on your personal credit score. Finding short-term loans or opening a business line of credit may be viable options. The downside remains in receiving a loan but incurring very high interest rates or in having to put up collateral. We’ll discuss these options in more detail in the next section.
Funding a business without financing
If you have a good idea for a business and a strong business plan, then you may be able to seek out ways to fund your idea without a need for loans or credit.
“You might attain the most success by looking at alternative sources of funding, such as friends and family, angel investors, micro-lenders, crowdfunding or grants.”
EXPERT: Marilyn Gaskell, founder of TruePeopleSearch.net
Crowdfunding, for example, has become more popular than ever. You can establish your brand online and through social media. Generate buzz and then ask the audience you’ve reached to help realize the business.
“At the present moment, businesses are allowed to raise up to $5M in capital funding on regulation crowdfunding platforms thanks to Title III of the JOBS Act. And because unaccredited investors are allowed to contribute money towards campaigns, the success of the business benefits both the business itself and the customers.”
EXPERT: Lauren Murdock, content marketing manager at Mainvest
Business financing solutions
Depending on the business that you want to start and where you are in the startup process, there may also be ways to use the business to fund itself before the business establishes its own credit.
When deciding on a loan, it would be wise to first figure out what type of loan fits your situation and would help you achieve your goals as a small business owner without requiring your personal assets as collateral.
Revenue-based/Cash flow loan
Revenue-based financing, or a cash flow loan, is a means of raising capital in exchange for a fixed percentage of the company’s future revenue. Furthermore, the size of monthly payments varies depending on how the business is doing. So, when revenues are strong (peak season), your payments increase, and vice versa.
- You have borrowed — $100,000
- Amount to be paid back — $150,000
- Monthly revenue repaid — 10%
If your revenue this month is $60,000, you would be paying the investor 10%, or $6,000. Whereas, if your revenue the following month is $30,000, you would then be paying the investor $3,000. The formula continues until you have completed the $150,000 you owe the lender.
“Revenue-based financing may be a viable option for a well-established small business with confidence in the revenue stream,” contends Barbara Weltman, president and founder of BigIdeasforSmallBusiness.com. She goes on to say, “If small business owners give their personal guarantee for such financing and the business can’t meet its obligations, owners on the hook are really in trouble.”
EXPERT: Barbara Weltman, president and founder of BigIdeasforSmallBusiness.com
Equipment financing is a type of loan that grants capital allowing businesses to purchase new or used equipment, which can equal up to 100 percent of the equipment’s value. The loan is then paid back over time with interest.
In this situation, the equipment itself –whether that be machinery, vehicles, or any form of technology— acts as collateral. As a result, equipment loans are often easier to qualify for and can be great options for startups, or small businesses with poor to average credit scores.
Scott Spivack, marketing director at United Medical Care, recommends equipment loans to small businesses because “[Equipment] loans are used to fund specific equipment or assets which serve as collateral. If you default on this loan, the company has the right to sell the equipment to recoup the investment. With these loans, the lenders offer alternative options to get their money back, which reduces the overall risk.”
EXPERT: Scott Spivack, marketing director at United Medical Care
|Max. Loan Amount||Loan Term||Interest Rates||Speed of Loan|
|Up to 100% of equipment value||5 – 6 years||4% – 40%||2 business days|
|Equipment is collateral||Equipment can become obsolete by the end of the loan repayment|
|Easier to qualify compared to other loans||Potentially requires a down payment|
|Affordable interest rates||Only applicable to businesses that must have purchased equipment|
A small business can be an incredible way to boost your personal net worth. But it takes work to get it off the ground. If you’re saddled with personal debt that’s holding you back from achieving your business dream, we can help.
Find solutions to pay off personal debt and improve your credit.
Article last modified on December 22, 2022. Published by Debt.com, LLC