Want to start a business but have student loan debt? It's possible
Starting a business is tough enough when you鈥檙e fresh out of school. Having a huge pile of student loan debt doubles the challenge.
The size of the average outstanding student loan debt has soared, from 2007 to 2014 to nearly $28,000, according to the Ewing Marion Kauffman Foundation. But despite the growing debt burden, some determined grads聽are heading straight into entrepreneurship.
Is that a wise idea?
Starting a business is expensive. Once your company is a year old, you鈥檒l find an array of, but your options are limited when you鈥檙e brand new. You have to ask yourself whether entrepreneurship is a risk worth taking when saddled with student debt.
Ken Ruiz Hamada and Joanne Danganan have wondered the same thing. The pair, two of the co-founders of a company called Ombu, have struggled with the need to work versus聽the desire to pursue a dream.
They鈥檙e so passionate about growing their聽 that they want to devote all their energies to it, Ruiz Hamada says.聽But he says he is always reminded of his financial burden: 鈥淚 have student loans and I can鈥檛 do that.鈥�
NerdWallet asked some experts and entrepreneurs whether student loan debt and entrepreneurship are a good mix. Their observations hold聽four pieces of smart advice:
1. Be daring, but realistic
A love of the outdoors led UCLA students Ruiz Hamada and Danganan, along with co-founder Brandon Harper, to start Ombu.
Student debt hasn鈥檛 been an issue for Harper. But Ruiz Hamada will graduate from the UCLA Anderson School of Management in June with $80,000 in student loans, while Danganan, who graduated with a sociology degree in 2010, is still wrestling with student debt of $60,000 while working full time.
Recently, Ruiz Hamada took聽the leap. He says he saved up so he could quit his job and devote more time to the business 鈥斅爓hile also finishing up his studies. Right now, Ruiz Hamada says he maintains聽鈥渢his delicate balancing act between my finances and chasing this dream.鈥�
Meanwhile, Danganan pursues her passion in her spare time. Her advice to new grads looking to start a business but struggling with debt: Go ahead and pursue the idea; there鈥檚 never a perfect time. But keep your day job if necessary. 鈥淢ake sure you don鈥檛 risk your finances being ruined,鈥� she says.
2. Be creative with financing and stay lean
Student loan debt can hamper your hunt for capital. 聽Consider 聽if possible, which won鈥檛 eliminate your debt but may ease the burden.
Student聽debt聽hanging over your head will likely make potential investors and lenders think twice about financing your small business. Danganan and Ruiz Hamada had to tell potential investors, 鈥淲e will need to include salaries as part of the investment,鈥� he says. Consequently, some investors passed:聽鈥淓arly-stage investors often don鈥檛 like paying for salaries.鈥�
There are other ways to raise money, of course.
鈥淗itting up friends and family鈥� is one, says Margaret Paddock, senior vice president at U.S. Bank. Crowdfunding is another increasingly popular tactic, especially if you have a product or service that you feel could could draw a lot of attention.
Whatever financing strategy you embrace, Paddock says, you must have a solid financing plan for your business and 鈥渒eep your expenses really, really low.鈥�
Remember that you have advantages as an aspiring entrepreneur fresh out of school, she adds.
鈥淵ou tend to be more nimble,鈥� she tells NerdWallet. 鈥淵ou have fewer responsibilities, like a family or a big mortgage. You have the ability to live simply.鈥�
3. Surround yourself with experts
On the other hand, you lack experience. That鈥檚 why Paddock encourages young entrepreneurs to seek out people who can help.
鈥淪urround yourself with advisers and experts,鈥� she says. Go to conferences and other events where you can find business owners who are willing to mentor and share.聽鈥淒on鈥檛 be afraid to ask,鈥� she says. 鈥淎 lot of people are so determined to do it on their own 鈥� it鈥檚 OK 聽to ask.鈥�
Think about聽organizations that can help, including the U.S. Small Business Administration, local chambers of commerce and academic institutions.
For example, Penn State鈥檚 Smeal College of Business, with help from聽alumni, is setting up a fund for students who want聽to start a business. Shawn Clark, a professor of innovation and entrepreneurship, says the goal is to help them 鈥渕ove their ideas forward despite their student loans.鈥�
If you鈥檙e weighed down by student loans, he says, 鈥測ou鈥檙e less likely to think about entrepreneurship. 鈥� It kills off the initial decision-making process.鈥�
by Smeal and the Federal Reserve Bank of Philadelphia found that enormous student debt burdens have hampered would-be entrepreneurs.
4. Think long term
Here鈥檚 a sobering thought about starting a business: Many of them fail. But when you鈥檙e just out of school, you鈥檙e starting a journey in which failure is not only natural but may also help you in the long run.
James Wang, who just got his MBA from UC Berkeley鈥檚 Haas School of Business, has what he calls 鈥渁 decent chunk鈥� of student loans, but that didn鈥檛 stop him from joining a team in starting a聽business聽鈥斅爋ne that by its very nature makes it more .聽He and his co-founders had serious intentions when they came up with a new type of vibrator. They felt that vibrators聽were being marketed to men 鈥渢o spice things up鈥� rather than to address the needs of women. They set out 鈥渇ix those issues鈥� and build a successful business.
The entrepreneur says he thinks聽about his student loan聽debt even as he鈥檚 building his business, 鈥渆specially since startup life doesn鈥檛 pay well.鈥� But at this stage of his life, he tells NerdWallet, 鈥淚 should be investing in the most enriching experiences possible, where I can learn as much as I can 鈥� after all, most of my earning potential is still in front of me.鈥�
鈥淣o matter what happens, I do think all the things I鈥檝e been able to experience, learn and build have made it worth the opportunity cost,鈥� he adds. 鈥淭here are fairly large potential returns both intangible and financial.鈥�
Benjamin Pimentel is a staff writer at NerdWallet, a personal finance website. Email: bpimentel@nerdwallet.com. Twitter:
To get more information about funding options and compare them for your small business, visit NerdWallet鈥檚 page. For free, personalized answers to questions about financing your business, visit the section of NerdWallet鈥檚 Ask an Advisor page.
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