Starting a business is undeniably hard, but with student loans, it can be outright impossible. It is well established that student debt can have a crippling effect on entrepreneurship, with the share of entrepreneurs between the ages of 20 and 34 falling to 27% in 2019, compared to 34% in 1996, in-line with the average debt among graduates at $30,000 currently, up from $10,000 in the 1990s.
For a freshly minted graduate, student debt can be like a handcuff, that could last well into middle age. That being said, if you are committed to getting your business off the ground, with the right planning and approach to budgeting, nothing should stand in the way of your dreams. Here are some key insights to get the ball rolling, and help you better assess your financial situation before taking the leap.
Alternative Funding Sources
We live in the golden age of startup funding with angel investors, VC firms, and a growing number of crowdfunding platforms constantly scouting for opportunities, but in reality early-stage funding still remains scarce. If you don’t have an innovative business model, or a unique idea with a strong value proposition, your chances of raising risk capital at the pre-seed stage is slim.
For those who are bogged down with student loans, even business loans aren’t a viable option. Most banks will be unwilling to take a bet on individuals who spend a large fraction of their incomes on servicing existing loans. However, you can still opt for a government-backed SBA loan, but even here you will be required to have sufficient collateral and a good credit profile.
Understand Cash Flow
Whether you have $10,000 outstanding, or over $200K in student loans, your financial situation ultimately boils down to the portion of your monthly budget that is diverted towards the servicing of debt. Opting for refinancing using services such as SoFi student loans, either for lower interest rates or longer terms can reduce your monthly payables giving plenty of breathing space to plan and maneuver.
A 2% drop in rates on a $100,000 loan can help borrowers save as much as $100 per month, and similarly refinancing to a longer term such as 15 years instead of 10 can result in substantial savings in your monthly outflows. You may end up paying more in interest in the long run, but the pay-off is worth it if you expect better returns by diverting resources towards your business or investment.
Borrowers can also opt for forbearance or deferment to pause student loan payments for a period of time altogether. Deferment is tied to a qualifying event such as unemployment, and it usually does not accrue any additional interest in the case of a Federal loan. Forbearance on the other hand does not require any qualifying event, accrues interest, and is awarded based on the loan servicer’s discretion.
If student loans and other existing commitments are making it untenable to start a business, it is recommended that you start small. There are plenty of opportunities for side hustles which can be started small, with no major investments or time commitment, and be scaled-up over time. This includes opportunities such as dropshipping, freelancing, and internet marketing.
If you can form a company and start generating consistent revenues, it will be a lot easier to get approvals for SBA loans, most of which require at least a two year track record. It might be hard to manage a job, multiple commitments, while also running a business, but that is precisely why it is called a hustle, and forms the crux of a vast majority of small business success stories.
For most people, business ownership represents a way out of the rat race. If you are currently struggling to meet ends with a student loan weighing you down, exploring options to improve your cash flow position, along with side hustles to augment your income is the way to go.
Millions of Americans took advantage of the recent pause in student loans over the course of the pandemic, to try their hands at various businesses and side hustles. With a proper planning and approach, this should work well for most people.