There are 45 million Americans who have student loan debt, and for entrepreneurs, this can make qualifying for a small-business loan more challenging. Student loan debt can impact your credit score and debt-to-income ratio \u2014 two components lenders use to evaluate a borrower\u2019s risk of defaulting. However, it is possible to get a business loan with student debt.<\/p>\n
\u201cMany times, I would say half of our loans \u2014 more than that \u2014 have student debt,\u201d says David Canet, managing director of the SBA Lending Group at ConnectOne Bank.<\/p>\n
While business loan requirements vary by lender, these guidelines can help entrepreneurs with student debt navigate the process.<\/p>\n
Proving your company has sufficient cash flow to handle business loan payments can be a hurdle for any entrepreneur, but especially those with student debt.<\/p>\n
Your business\u2019s cash flow must be able to support personal expenses, like student loan payments, on top of business loan payments, Canet explains. Student loan debt also affects your debt-to-income ratio, a metric lenders use to assess your ability to repay a loan. Canet recommends adding a personal budget to your business plan to show that you\u2019ve put thought into your personal financial obligations, like student loan payments, in addition to business ones.<\/p>\n
Would student debt cancellation change things? Short answer: Not yet.<\/p>\n
\u201c[Lenders are] not probably reacting much to all the news about debt cancellation and stuff like that, just because it\u2019s so complicated,\u201d says Carolyn Katz, a SCORE mentor who helps small-business owners apply for loans. \u201cFor them to figure out who might get which amounts of debt canceled at what point is probably above their pay grade.\u201d<\/p>\n
For now, factor your full balance into your budget.<\/p>\n
Student loan debt can also impact your credit score, and lenders look at your credit history to see if you\u2019ve made payments consistently over time. If you haven\u2019t, you\u2019re not alone, says Katz. Most of the entrepreneurs she\u2019s worked with have something negative (like a missed student loan payment) on their credit reports.<\/p>\n
What matters is that you\u2019re forthcoming about the reason behind a hit to your credit. This, Katz explains, lets the lender know that you understand what being a responsible borrower means.<\/p>\n
Consider strategies to build your credit score, and expect lenders to put greater emphasis on other factors like your cash flow and how much collateral you have, says Desha Elliott, a local market manager at Accion Opportunity Fund, a nonprofit lender and community development financial institution, or CDFI.<\/p>\n
Large, traditional banks typically have the most stringent lending requirements, making it difficult for small businesses \u2014 even those without student debt \u2014 to qualify. Instead, entrepreneurs may want to explore their local banks, credit unions or CDFIs, which often take a more personal approach and place extra weight on an applicant\u2019s character.<\/p>\n
\u201cWe\u2019re looking at credit, collateral, character and cash flow \u2014 and more so specifically your character and cash flow,\u201d says Elliott. Factoring in the entrepreneur\u2019s personal experience and circumstances allows AOF to be more inclusive when it comes to loan approvals.<\/p>\n
Similarly, Canet says he considers the applicant\u2019s effort, commitment and dedication on top of their finances.<\/p>\n
\u201cSmall-business lending at this level is never just brass tacks,\u201d he says, recalling a borrower who was ultimately approved for a business loan despite significant medical school debt, in part because of their proven ability to overcome challenging situations.<\/p>\n
Business owners who struggle to meet typical business loan requirements should be wary of predatory lenders that aren\u2019t transparent about the true cost of borrowing. Before accepting a loan offer, Elliott suggests parsing out the annual percentage rate and terms, as well as finding out whether there are additional fees, such as a prepayment penalty.<\/p>\n
\u201cIf the loan deal sounds too good to be true, it probably is,\u201d warns Carolina Martinez, CEO of Cameo, California\u2019s statewide micro business network.<\/p>\n
With any loan offer, Elliott says to \u201ctake the time to assess, \u2018Can I afford to make this payment and do what I need to do with the money that\u2019s being lent?\u2019\u201d<\/p>\n
If not, it isn\u2019t the right financing.<\/p>\n
\u201cIt is as important to be ready to apply as it is important to select the right product,\u201d says Martinez.<\/p>\n
Free resources, like SCORE mentoring and coaching from CDFIs, can help entrepreneurs optimize their application and prepare to answer any questions lenders may have.<\/p>\n
\u201c[The] loan application is the entrepreneur\u2019s opportunity to make their pitch, and first impressions count,\u201d says Canet.<\/p>\n
\u201cIf you have a good business idea or a good idea to grow your business, and you think a loan makes sense for you, don\u2019t be put off because you have student loan or other debt,\u201d says Katz. \u201cGive it a try.\u201d Even if you\u2019re turned down, she explains, lenders often give you a reason why.<\/p>\n
That way, you can improve your application, continue to pay down debt and apply again in the future.<\/p>\n
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