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How Millennials Can Start a Business When They Have Personal Debt

Rebecca Lake

Rebecca Lake is a personal finance writer who focuses on credit, real estate, investing and small business. She regularly writes for Credit Sesame, US News, Investopedia and Daily Finance.

Latest posts by Rebecca Lake (see all)

Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

If you’re a millennial who dreams of owning your own business, you’re not alone. According to a joint survey from EY and the Economic Innovation Group, 62% of young adults have considered starting their own business. The biggest obstacle standing in their way? For 42% of them, it’s a lack of financial means.

Starting a business with no capital is tough enough. It’s even more challenging when personal debt factors into the equation.

Millennials certainly carry their fair share of debt. Consider this data, taken from Credit Sesame’s 10 million members. Consumers between the ages of 18 and 30 have an average of:

  • $2,613 in credit card debt
  • $17,363 in car loans
  • $29,728 in student loans
  • $189,929 in mortgage debt

Even with debt, you don’t have to abandon your entrepreneurial dreams just yet. Starting a business with debt is not out of the question with the right approach.

Get a Grip on Startup Costs

Some businesses require millions of dollars in capital to get off the ground; others require a much smaller investment. If you’ve fleshed out an idea for a new business, the first step is to figure out how much money you need to turn it into a reality.

A ballpark figure can help you decide how to finance your new venture. For smaller amounts, you might be able to raise the funds you need from friends and family. A bigger chunk of change, on the other hand, may require a small business loan instead.

If you need a loan, the next step is to draft a business plan.

Your business plan is your blueprint for how you plan to run the business, including how much revenue you expect to generate. When you apply for a startup loan, your lender will want to see a copy of your business plan.  

Streamline Your Debt

A business loan can put even more strain on your budget if you’re already making payments against other debt each month. Find ways to make your existing debts less expensive and more manageable.

For instance, consider refinancing or consolidating your student debt. Combining multiple loans into a single loan can make your payments easier to manage, and may lower your total monthly minimum payment.

Credit card debt can also be consolidated or refinanced. Transfer all or some of your balances to a card with a low interest rate to save money and lower your monthly obligation. A 0% rate can help you make a big dent in the balance with each payment.

While you downsize your debt, review your personal expenses. Look for expenses you can cut to free up cash, and then apply it toward your debt.

Pay on Time

Without an established business credit file, your ability to get a business loan depends largely on your personal credit standing. Lenders use your score to gauge the likelihood that you will repay the debt, and a low score could be a roadblock between you and that loan.

If you’re in debt-payoff mode, get your payments in on or before the due date every month. Late payments can knock major points off your score, which you can’t afford if a small business startup loan is in your sights.

Research Financing

It’s your (potential) success, so it’s in your best interest to do your homework. Small business loans aren’t created equally, and if you already have debt, you have to be particularly careful about how you borrow going forward.

Think about what size loan you need and how much you can afford to repay each month. The answers will help you determine what loan terms might work for you.

Your personal credit standing influences lenders’ willingness to lend to you and the interest rate you’ll pay. Your rates in turn influence your minimum monthly payment and the overall cost of your debt. Generally speaking, interest rates go up as credit score goes down. Know your score, and work to improve it while you develop your business plan.

There’s no need to despair if you’re in the same position as the average college graduate in their 20s with a debt balance of $22,135. As you compare loan options, just consider the amount you can borrow, the length of the repayment term, the interest rates, and any lender fees. The more research you’re willing to do, the better the odds of finding a loan that fits your needs and your budget.  

Rebecca Lake

Rebecca Lake is a personal finance writer who focuses on credit, real estate, investing and small business. She regularly writes for Credit Sesame, US News, Investopedia and Daily Finance.

Latest posts by Rebecca Lake (see all)