Explore Formal Financing Options
If you’re carrying a lot of personal debt, your monthly cash flow is probably not optimal for funding a business. There are some options for business owners in your position, including alternative lenders and credit card financing. However, each comes with pros and cons, and you should thoroughly understand what’s involved before moving ahead.
Ethan Senturia, a partner in business advisory firm Greendoor Partners and author of Unwound: Real-Time Reflections From a Stumbling Entrepreneur (Blackbird Ventures, 2017), said affordable financing options, such as loans and lines of credit with low interest rates, almost always require a personal guarantee from the business owner.
“Even though you can get a business loan with a heavy personal debt load, most small business lenders will ask that you personally guarantee repayment of the loan in case your business can’t make the payment,” Senturia said. “This could add a heavier burden on your already-heavy debt obligations and could add stress to your personal life. Financing that doesn’t require a personal guarantee … is very expensive and can significantly strain your new business.”
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You can also probably secure additional personal credit cards for your business, but Senturia doesn’t recommend this, as these cards will not help you build business credit. Instead, they will hurt your personal credit. [Read related article: Small Business Financing Options That Bypass Traditional Banks]
If you go with a loan, do some research to decide if a revenue-based or cash flow lender would be better for your business. Revenue-based lenders, also known as subprime lenders, care more about your business revenue and personal credit score than your personal debt. Senturia noted that these lenders are often quite expensive but less stringent in their underwriting. Cash flow-based lenders, on the other hand, will look at your business’s ability to pay your business debt from your cash flow, including your personal living expenses and debts, he said.
“Cash flow-based lenders will also consider outside personal income as a positive addition and will give you credit for this in their cash flow equation,” Senturia said. “Since many business owners rely on the business to cover their personal expenses as well, the impact of personal debt loads oftentimes will be factored in.”