Starting your own business can be really exciting, but the financial realities can be incredibly stressful. It’s hard to get money to start your business if you don’t already have a lot of cash and other assets.
Young people particularly struggle due to the heavy burden of student loan debt that follows them around after college graduation. If you are thinking about starting your own business, you might want to research whether or not consolidating and refinancing your student loans could help you finance your dream.
What to Consider When Starting a Business
You might be surprised to find out that your ability to finance a new business is entirely dependent upon your personal financial situation and credit. When you’re starting out, everything from business checking and credit cards to business lines of credit depends on your personal assets and credit history.
It might seem strange that your personal finances are more important than your business prospects, but keep in mind that in the beginning you are your business. Banks may not be experts in the unique details of your business plan and prospects, but they are experts in evaluating personal creditworthiness. Plus, the way in which you handle your own personal finances is a pretty good indicator of how you will likely manage your business.
This is why you’ll want to get your personal finances in order and simplified before you start your business. Refinancing and consolidating your student loans can reduce the number and amount of payments you make each month. This will also help if you experience some periods of unstable earnings while starting your business. Consider a loan repayment plan that will give you the flexibility to weather those challenging times.
Federal Loan Consolidation
Federal loan consolidation is part of a program that the government refers to as a Direct Consolidation Loan. You can only use a Direct Consolidation Loan for your federal student loans. Private student loans are not eligible for consolidation in this program. A federal loan consolidation, however, allows you to combine two or more federal student loans into one federal student loan with one monthly payment.
The interest rate on the new loan is a weighted average of the rates on the loans that you are consolidating, so you won’t benefit from a lower loan interest rate. You can, however, extend your loan term out for as long as 30 years. This can reduce your monthly payments, which will be helpful as you get ready to start your business. Plus, you still have the benefits associated with federal student loans.
Consolidating and Refinancing With a Private Lender
Consolidating your student loans through a private lender is considered a form of refinancing. You can refinance both federal and private student loans with a private lender. The proceeds of your new loan pay off the existing student loans that you include in the consolidation and refinancing.
Private lenders all have different criteria for loan amounts considered for refinancing as well as credit criteria for applicants. You do need to have good credit in order to refinance your student loans, and some lenders require evidence of a stable income and employment. This may be a challenge once you are self-employed. So, it is best to consider refinancing before starting your business.
Still, you should be aware of some of the potential cons associated with refinancing your student loans before starting your business. Although you may get a lower interest rate by refinancing your student loans, your payment may not be lower if you also have a shorter term length.
Private lenders simply don’t offer as many repayment options as those you get on federal student loans. With a private student loan, you don’t have as much flexibility with deferment, forbearance, and financial hardship. So, you should weigh the benefits with the risks before refinancing your student loans.
Dealing With Personal Debt Before Going Into Business
Finally, consider the impact of your personal debt on your business finances before going into business for yourself. Most of the funding for small business comes from the owner’s own savings, and there can be many months (or longer) at the beginning where you struggle to earn any income at all.
If you have a lot of outstanding debt, it can be difficult to get through these challenging times. Recent data shows that the average debt per student borrower is $27,975. So student loan debt can make it difficult for recent college graduates to pursue their entrepreneurial goals.
Business owners can also struggle with getting approved for business lines of credit when they have a high personal debt-to-income ratio. Getting your personal finances simplified before starting your business can be the first step toward making your business a success.