You don’t have to be debt-free to be in business. In fact, many people start a business to get out of debt. The trick to doing that successfully is to find other sources of funding. First, come up with a profitable business model. Taking on a partner with deep pockets might be the right move after that. Another option is applying for financing from a traditional or online lender.
Once your business is turning a profit, you can work on your personal debt. One way to start that process is by using the debt snowball method, which focuses on paying off the smallest debt first, then moving to the next smallest. Use a debt snowball calculator to see how this works in your situation. The technique could be useful even if your business isn’t making money. Keep that in mind as you review the suggestions below.
Option #1: Forming a partnership to acquire funding
Asking your high school buddy to lend you some cash is not the same as forming a business partnership with someone who can provide ongoing working capital. Relying on a friend for cash while you put the sweat equity in could result in a dispute over ownership when the company begins to thrive. Don’t jeopardize your friendship that way.
A partnership should be a business agreement with the amount of the investment and the terms of ownership and/or return of funds clearly outlined. Make it official, even if the investor is a friend. Handshake deals aren’t binding in court, and they’re easily broken. Remember, it’s your idea and business plan. That puts you in a strong position to negotiate.
Option #2: Traditional financing from the bank
Loans aren’t easy to get when you’re deeply in debt. Most lenders require a personal guarantee that the funds will be paid back, and they’ll charge a high-interest rate if your credit history is questionable. Excessive personal debt also could lower your FICO credit score, which will affect your ability to get a loan from traditional sources.
If your business has physical assets, like equipment or real estate, you may be able to get a secured loan or line of credit. Either of these would be a better option for the business because interest on secured debt is typically lower. It’s also a risk because the business could potentially lose those assets if you default on your loan payments.
Option #3: Find a side hustle to make extra money
This might be too much for you if you run a business and already have a full-time job. If not, find something you’re good at and turn it into a side hustle to make extra money. You could sell personal items at a yard sale or on eBay, start an after-hours dog walking service, or do online freelance work. There’s always a need for writers, graphic designers, and data entry people.
An ideal scenario would be to find a side hustle you can do while you’re running your business. If you’re a start-up, things might be slow for a while. Finding something else to occupy your time and bring in extra cash will be a win-win situation for you. Give it a try. You might find yourself owning two full-time businesses in time.