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6 Steps to Bankroll Your Business While in Personal Debt

By Nicole Fallon Taylor, originally posted on Business News Daily

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, cars or all of the above, and these heavy outstanding balances could put their dreams of business ownership on hold.

Quitting your day job to start a business when you’re thousands of dollars in the red is probably ill-advised, but carrying 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 looking to start a business while you’re in debt, here are a few smart steps to help you minimize startup expenses and keep your cash flow steady.

If you’re carrying a lot of personal debt, your monthly cash flow is probably not optimal for funding a business. There are a lot of options for business owners in your position — crowdfunding, alternative lenders, credit-card financing, etc. — but each choice comes with pros and cons, and you should thoroughly understand what’s involved before moving ahead.

For example, Dealstruck, business financing provider says that affordable financing options (i.e., loans and lines of credit with a lower interest rate) almost always requires 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. 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 Dealstruck doesn’t recommended this, as these cards will not help you build business credit, and will instead hurt your personal credit.

If you do decide to go with a loan, do some research and decide if a revenue-based or cash-flow lender would be better for your business. Subprime lenders, also known as revenue-based lenders, care more about your business revenue and personal credit score than personal debt loads. Dealstruck notes that these lenders are often quite expensive, but are 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 lenders will also consider outside personal income as a positive addition and will give you credit for this in their cash-flow equation. 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.

You may not have the money to bankroll your business right now, but someone else 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. You may want to consider a 50-50 business partner, but if you’d rather retain full control of your business, Tayne suggested turning to a friend or relative 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 to give you a loan,” Tayne said. “I don’t always recommend asking family, but in this situation, you can consider it and have a time frame set in when you can pay them back.”

Entrepreneurship often means making personal sacrifices for the sake of your business, and money is no exception. Serial entrepreneur Nicole Bandklayder of NB Talent Services, Bijouxx Jewels and The Cookie Cups, was carrying a lot of credit-card debt when she started her first business, and realized she needed to cut 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,” Bandklayder said. “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.”

Bandklayder relocated from notoriously expensive New York City to Minneapolis to cut down on her bills, but you can pare your expenses in much smaller ways. 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.

Your business doesn’t have to be “full steam ahead” right away. If you can’t afford to go all-out at the moment, start slow, Bandklayder 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,” she told Business News Daily. “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 advised social media campaigns that are personable, memorable and eye-catching.

“Images speak louder than words,” Tayne said. “Create a [visual] advertising campaign that makes an impression. This can be low in budget and gain you more clients.”

No matter how you intend to finance your business, it’s critical to make a plan for that money, especially if you are looking for a loan. 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. 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.

Although it may be tempting to use your profits to pay down your personal debts, Tayne said your business 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.”