While it’s not impossible to take out a business loan with student loan debt, it is a lot harder. Lenders are more likely to approve loan applicants with a long, successful track record, excellent credit, and low debt levels. An entrepreneur with student loan debt or other outstanding personal loans usually has none of these characteristics. That said, there are steps you can take to improve your chances of approval. Of course, if you are approved, responsibly managing both loans will still be a challenge. Therefore, to help you successfully finance your business despite student loan debt, this post will provide tips on:
- How to get your loan application approved.
- Finding business loans that are easier to qualify for.
- Responsibly managing a business loan with student loan debt.
How to Get Your Business Loan Application Approved with Student DebtWhen deciding to approve or reject a loan application, lenders use what is called the Five C’s of Credit:
- Character: represented by your credit history.
- Capacity: measured by your debt-to-income (DTI) ratio
- Capital: the amount of money you have
- Collateral: an asset that can secure your business loan.
- Conditions: the type, purpose, amount, and terms of your loan
Financing Alternatives for Entrepreneurs with Student Loan DebtGenerally speaking, loans with shorter terms, lower amounts, and higher interest rates are easier to qualify for. Here’s why:
- Shorter terms present less risk to the lender that your situation will change and you’re unable to pay.
- Lower loan amounts limit the amount of money a lender risks losing if you default.
- Higher interest rates result in larger profits for lenders, which makes them more willing to take on more risk.
- Purchase order financing
- Merchant cash advances
- Invoice factoring
Managing a Business Loan with Student Loan DebtWhen you already have debt, taking on more comes with risk. This makes it even more vital to create a budget, build an emergency fund, pay on time and in full, and closely monitor cash flow. It’s also important to understand the differences between student and business loans. Once you do, you’ll have a better sense of the options available for managing both loans.
Business Loans vs. Student LoansIn terms of general structure, business loan payments are similar to student loan payments. You take out the loan for a certain amount, with a certain interest rate, and you pay it back over time. That, however, is where most of the similarities end. Student loans have grace periods, a predetermined period after you graduate before your first payment is due. Also, federal student loans offer many possible repayment plans. According to Investopedia, these plan options include:
- Graduated repayment: Starts low and increases monthly payments as time goes on.
- Extended repayment: Lengthens your loan period, which lowers your monthly payment.
- Income contingent repayment: Determines payment based on your income.
- Pay as you earn: Limits your monthly payments to 10 percent of monthly income for qualified borrowers.