Start a Business Even If You’re in Debt
It’s a fact of life for many: debt. There’s no point being embarrassed or trying to hide it, because pretty much everyone is struggling with it. Back in 2018, overall consumer debt in America reached $13.3 trillion, with $834 billion of that amount accounting for credit card debt.
Many feel like it’s impossible to pay off, though with the right debt help it is totally possible – it just may take a while. So how do entrepreneurs deal with the issue of personal debt and wanting to start their own business? Should they wait until their debt is clear, or are there other options?
Options Available
Applying for a business loan can be difficult when you have bad credit. This is because history has shown that business owners in debt tend to have issues managing cash flow – after all, sometimes you have to dip into your own personal funds to keep your business afloat. With this in mind, entrepreneurs with debt are considered high-risk borrows. But does that mean you’re out of luck?
Not necessarily. Though you may not get the loans you want, it is possible to take out smaller loans that come at higher interest rates and shorter terms. You can manage this by having a slow start to your business where you are able to show fiscal responsibility. Eventually, you may be granted access to better loan opportunities after proving yourself.
Instead of taking out a loan, you could also consider asset-based debt financing where you take out something like an equipment loan or receive short-term financing if you are a service provider. Both are considered asset-based loans, meaning that the asset being funded can be used as collateral.
For instance, if you are unable to keep up with payments on your equipment, then your lender can simply repossess and then sell off that equipment in order to make their money back. Because of the collateral, these kinds of asset-based loans tend to be easy to acquire for people with existing personal debt.
Can You Partner with an Investor?
Depending on your industry and your situation, applying for either kind of loan may not be a realistic option for you. In this case, it may be in your best interest to find an equity investor or partner who is willing to take on the risk of doing business with you.
Typically in these cases, you will have to give up a large degree of ownership stake in your business. Alternatively, you could partner with someone who has good credit like a friend, family member, or someone in your business circle – they will be able to take out a business loan on your behalf.
No matter how you decide to go about it, make sure that there is a written agreement outlining the terms of your arrangement. This agreement needs to outline exactly how much time and resources each party is committed to investing, as well as the equity stake, payout each can expect to receive, and a partnership exit strategy (you never know when you might need one).
While starting a business in debt can be risky, it can also be the best investment you ever make.
We hope you enjoyed this promoted piece as much as we did!
