Starting a new business can be tough, but it is definitely more challenging if you’re struggling to pay off existing debt under your name. 2017 was when Americans were identified to have the largest outstanding revolving credit card debt in U.S. history, amounting to $1.021 trillion. Falling into debt can be a lot easier and happen a lot faster than one would think. Many people are struggling to overcome it, budding business owners included.
Going on the journey of establishing your own business while dealing with personal debt might do more harm than good for aspiring entrepreneurs. However, this decision is not something that is considered taboo. Future business owners might want to live in the moment and do not find any harm in pursuing a business even with outstanding debt. But still, it is important to keep in mind that personal debt can pose a challenge later on.
For one, personal debt can be a factor that lenders or investors will look at to know if your business would be worthy of their financial support. A new business owner’s existing debt or even terrible credit history can largely impact money lenders’ decisions to provide funds for your business’s start-up. You will end up having a hard time applying for business loans if your creditworthiness is lackluster due to personal debt. But not all debts are the same, with some worse and some more manageable than others. Let’s get into the different types of personal debt most first-time business owners are dealing with.
Types of personal debt most new business owners have
Personal debt, otherwise known as consumer debt, is an individual’s owed financial obligations. This is usually the money borrowed for cars, vacations, consumer goods, and so on.
A specific type of personal debt that most people, including new entrepreneurs, have is credit card debt. This is known as revolving debt; it is unsecured, making it easier for individuals to fall into an overwhelming amount of debt in a short amount of time. If this debt is not repaid, it can cause significant damage to your credit score and additional interest. It is important to be conscious of the products you buy using your credit card. Always remember not to spend on something that is unnecessarily beyond your budget.
Another type is student loan debt. Chances are, you have just graduated from college and are eager to kick start your career as a business owner. As of 2020, student loan debts have reached up to $1.5 trillion. Most young adults spend a long time trying to pay back what they owe their universities. Juggling between paying off student loan debts and maintaining good cash flow for your business will not be easy.
Also, mortgage debts are a major type of personal debt. These are loans from financial institutions that help you purchase the most basic necessity a human adult should have: a house. This debt usually requires the borrower to have a stable and reliable income to turn in payments every month for the next 10 years.
How to keep personal debt from affecting your business
You can keep personal debt from negatively affecting your business by properly managing your finances. Creating budgets and reviewing your expenses can help you monitor and control your spending habits. This enables you to reserve money for paying off your personal debts. Also, you can closely keep track of your creditworthiness and borrowing ability for your new business. Managing finances might seem like a complex task, but this can be easily done with finance tools or even with financial assistants and experts’ help.
Moreover, it is essential to keep a foreclosure from happening when dealing with mortgage debts. If a borrower neglects to maintain a mortgage document’s terms, the lender has the right to take ownership of the property and sell the home. Once this happens, an individual’s credit score can drastically drop, affecting your credit history and, ultimately, your business.
Ways to start a business even with personal debt
Despite having a history with personal debt, setting up a new business is not impossible. Some businesses might not need a large amount of money to begin their operations.
Firstly, it is recommended to pick out a modest and inexpensive business. Going for a business that does not require a large amount of capital can be carried out with creativity, resourcefulness, and hard work. Along with this, having low-cost marketing plans or strategies can contribute to your business’s smooth and effective flow.
Secondly, creating a business plan can organize your goals and help you figure out a clearer path towards success. With a strong business plan, you will more likely acquire investors and lenders’ interests to aid your new business. This way, you can raise money, make major decisions, communicate with stakeholders to secure funding, and help locate areas for improvement.
Lastly, consider applying for microloans. Microloans are small-scale loans from individuals offered to new and small businesses that cannot qualify for traditional financing. The United States Small Business Administration offers loans to borrowers for up to $50,000 to assist in creating and success of a small business through their microloan program.
Overall, it can be said that every entrepreneur’s financial state will vary. The fate of business owners who have an existing amount of debt is unpredictable and risky. Thus, it is best practice to formulate back-up plans and tactics. With this new information, you can discover and search for ways to productively overcome personal debt for your business’s growth and success.