It's a fact of life in our modern economic climate: Americans are in debt. In fact, according to recent reports from the Federal Reserve, at $1.021 trillion, Americans now have the highest credit card debt in U.S. history.
This mounting debt is a looming problem for individual consumers as well as society at large. But if you're an aspiring entrepreneur who needs funding to start your business, the weight of this personal debt may be particularly intrusive to your immediate plans.
Because most small business lenders see the creditworthiness of a business as synonymous with the personal credit of its owner, entrepreneurs with a poor personal credit history or a significant amount of existing debt often struggle to qualify for a business loan. These lenders have seen from experience that business owners with significant personal debt are more likely to struggle with cash flow within their business, meaning that lending to these individuals is a high-risk proposition.
So, if you're one of the millions of Americans who carry a significant amount of personal debt, does that spell the end of your business dreams? Not necessarily. Consider these six alternative funding solutions to start a business even if you have debt.
1. Bootstrap Slowly to Build Your Credit
Though having personal debt won't necessarily preclude you from taking out a business loan, it may be that the loans available to your business--at least in the beginning--offer a lower amount of capital at a higher interest rate and over a shorter term than you'd ideally prefer. However, if you can start small with your business plans and show fiscal responsibility with this initial loan, you may unlock access to larger sources of funding with more favorable terms over time.
Consider ways that you might adapt to your business model to have lower overhead requirements at the start. This way, you can use a smaller short-term loan to fund your initial stages of business while building a positive credit history in pursuit of that larger, long-term loan.
2. Consider Asset-Based Debt Financing
Do you need startup capital for your business in order to purchase expensive equipment? If so, an equipment loan may be a solution that is accessible regardless of your debt situation.
Similarly, if you're a service provider and need short-term financing while you wait for your invoices to be paid, you may be able to access accounts receivable financing without having to disclose your existing personal debt.
Both of these business financing products are considered asset-based loans, which simply means they're being used to fund a specific asset that can be used as collateral.
If you default on an equipment loan, for example, your lender can repossess and sell the equipment you purchased in order to recoup their investment. In the same way, an invoice financing company can look directly to your customers to collect payment for the cash they advanced to you.
Because they offer an alternative way for the lender to get their money back, these asset-based business loans tend to be more accessible to borrowers who have existing debt.
3. Partner With an Investor
Even with the most innovative of business models, some industries, and business types have high general startup costs that are unavoidable, making either a bootstrapped approach or asset-based financing an unrealistic option.
If this describes your business model and you're not able to qualify for a high-value bank or SBA loan on your own merit, your best option may be to partner with an equity investor who has the necessary financial resources to fund the business.
Of course, it can be difficult to find an equity investor or partner willing to take on this degree of risk on your behalf--and doing so will likely require giving up a significant ownership stake in your business. But if this is the only available option to get the funding you need, it's a possibility worth considering.
4. Connect With a Creditworthy Business Partner
In some circumstances, you don't need to connect with a business partner who is independently wealthy to reap the benefits of partnership. Instead, you might choose to partner with someone who has limited personal resources, but who also has an excellent credit history and can qualify for debt financing unavailable to you personally. This may be a friend or family member, or simply someone in your business network who has skills to offer to the endeavor.
Regardless of the relationship or your funding strategy, what's most critical is that you have a clear, written agreement in place before pursuing any business partnership. This agreement should spell out exactly what each business partner is committed to investing in terms of time and resources, the equity stake and payout each can expect to receive, and an exit strategy for the partnership.
It's worth hiring an experienced partnership attorney to draft this agreement in order to pre-empt any future challenges.
5. Let Your Audience Invest in Your Business
Starting a business even if you have debt is possible, but it requires thinking outside the box. So, why limit your potential contributors to your business to formal angel investors or your most immediate friends and family?
The larger community that you plan to serve maybe equally interested in doing their part to make sure your business is a success.
Particularly if you're starting a business in a specific niche that already has a thriving community, crowdfunding your business through a platform like Kickstarter or Indiegogo can be a great way to get the word out about your business while building up the capital you need to get started--one small donation at a time.
6. Apply for Business Grants in Your Niche
Although limited and highly competitive, business grants can be the ideal solution to fund your business even if you have debt. This is because they allow you to obtain a set amount of business funding without any expectation of repayment or equity ownership, making them the closest thing to "free money" that an entrepreneur will likely ever find.
Keep in mind that small business grant programs tend to be very specific about the type of business or circumstances they are intended to fund. To be successful with your application, you will need to find grant programs that are a strong fit for your business and make a compelling argument for your entrepreneurial vision.
Starting a business even if you have debt is certainly a challenge, but it shouldn't be seen as insurmountable. Provided you can adapt your business model, take steps to improve your credit, and stay open-minded to alternative sources of funding, there's no need for personal debt to hold you back from your business ownership goals.