How to beat the odds and start a business with student loan debt

Grad school students in a pre-doctoral workshop at USC. The average student loan federal debt now stands at over $36,000 in April 2022.

Getting business funding from a retail bank these days, even for existing enterprises, can feel like climbing Mount Everest. Big banks have shied away from lending to small businesses for many years and the problem hasn’t been solved by grants and emergency relief from government; in fact Harvard Business school identified small businesses who deliberately didn’t ask for government funding in 2020 unsure they would ever be able to pay back the loan. If you have the added issue of carrying student debt in this grim economic climate, 2 years on from the 2020 Covid lockdowns, you will need to find alternate means of funding to credit card and bank loans.

Part of the solution however is to first understand why banks are flat-out rejecting most new startup applications for a loan. There is a general consensus that it comes down to 3 main factors:

1. In a pandemic world, there is more risk and less profit on underwriting smaller loans under $50,000 for a bank. Increased regulations and internal red tape designed to reduce their portfolio risks mean banks are tending to focus on loan products over $500,000 to larger, more stable customers.
2. The loss of competition in the banking sector charged by a decade-long downturn in community banking since the Dodd-Frank Act in second quarter of 2010— has sidelined community banks who were traditional lenders to small businesses— removing an important avenue of approved funding for new startup owners.
3. The devastating impact of Covid on new startups, in combination with some of the highest job losses since the great depression particularly affecting casual workers, has resulted in would-be startup owners who in the past have been able to rely on self-funding with money from friends and family, savings, or even tapping into a 401(k), cut off from those funding sources.

The Biden administration pausing federal student loan repayments until August 31, 2022 may be good news for those facing an imminent loan default, but it is not a reprieve if you are wanting to start a new business. Rising interest on student loans, an average public university student debt of at least $30,000 borrowed and mounting federal loan debts exceeding $36,000 (up $18,000 on 2007, 15 years ago) requires today’s small business owners, with or without a monster student debt, to be open to using new platforms when launching their product or service.

Research published by Education Data Initiative indicates the federal student loan has doubled in 15 years.

Small businesses can leverage freelance marketplaces like HostJane, which is dedicated to helping small business owners counter the hidden costs of establishing a new business in 2022. Being able to find cheap labor fast, from affordable web development to set up a decent website or mobile app, to professional logo design and product packaging specialists, to freelancers who offer business marketing help for just a few dollars can help bear the costs of launching new ventures. These costs are now substantively deeper than traditionally estimated in SBA-guided business plans to fund, develop and produce a product or service.

In McKinsey’s June 2020 report on small business resilience in the global Covid economy, one of the cases for supporting small businesses, named as an Economic Multiplier — the idea that small businesses provide a B2B supply chain relied upon by larger companies — may already be broken. Big companies with unlimited resources and huge venture capital to access offshore supply chains and fund whole offices full of specialized workers that can quickly outcompete smaller entities, are in fact widening the wealth gap by restricting small business growth. Dan Price, once named ‘best boss in America’ points out that such companies with large resources have found new ways to use recession-related issues, and Covid, to knock out small competitors from the market by hiking prices.

Finding distribution, supply chains and the associated tax implications in starting a new venture is today a more complex issue. The struggle is surviving in the same space as large business entities who have collectively seen the benefits of reducing small business total market share to as close to 0% as possible.

Eliminating student debt is preferable but it wouldn’t make the road easier. Even if the Biden administration canceled all student debt today, going far and above its announcement on April 19, 2022 to expedite loan forgiveness to 3 years with a highly cited “income-driven repayment” initiative to allow people to repackage their debt into smaller monthly repayments based on income and family size, since the banks are not lending to even small owners with good credit scores who have diligently managed their debts, it won’t solve the problem of getting funding with student debt. New platforms like HostJane must be embraced to keep costs down.

Now to consider alternative funding sources. The pandemic has surfaced a new wave of crowdfunding platforms with investors who are familiar with the above issues facing startups and may be more willing to invest in new business owners who are managing existing debts; namely SeedInvest, which has a growing community of over 600,000 angel investors, and StartEngine which boasts over $500M in seed funding and appears to be attracting some entrepreneurs to pitch on StartEngine first, passing over Kickstarter and Indiegogo.

While others discuss merchant cash advances, credit card loans (presuming you have a good enough credit score) and even raising capital with cryptocurrency for example operating crypto master nodes, staking cryptos, these options have hidden pitfalls. Similar to using a peer-to-peer marketplace lending solution like Prosper and Lending Club, care needs to be taken using any of these routes that you don’t wind up in more debt.

Particularly with crypto, unless you really know what you are doing, understand the ins and outs of how to research exchanges before investing your own money, including how to securely store your crypto in a digital wallet with the daily changing security issues, the role of crypto and buying and HODLing coins as investment may be as precarious as using a private loan company.

A safer bet for securing a small business loan is to get assessed by a business micro-lender like Kabbage or FundBox, that both fund up to $150,000 in loans to small businesses. These operators work by allowing business owners to close a pay window between the cash you need upfront to meet immediate accounts receivables and the time your customers pay, enabling you to repay the short term loan. That may not be an option for a new startup still establishing its first customer set.

While SBA Small Business Administration centers and Grants.gov can depending on your eligibility offer some grants; in the government funding space, a better option for government assistance may be if you qualify under The Community Development Financial Institutions Fund (CDFI Fund) which distributes small loans to businesses across the country.