Personal Finance

How I Funded My Business With Student Loans

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How to Finance Your Start-Up: Debt vs. CashSo, you’ve got it nailed down: That business idea that’s haunted you (in a good way) for months or even years. It may have taken a while to sort through your thoughts and formulate your ideas but now you’re ready to move forward and share your vision with the world. There’s only one looming question: How will you finance it?

Before you let this question stop you dead in your tracks, allow me to share my experience with you.

When I started my business, I was a student in business school. And, as you can imagine, I wasn’t exactly flush with cash. Yet, the time had come when I needed to move forward and I had to determine how I was going to fund the venture.  I knew I needed about $10,000 to play with. In thinking about how to obtain the money, the issue I had was not one of scarce resources and choices. Rather, I needed to make the best decision based upon the multiple choices and directions I could have gone in.

The first option I considered was obtaining a small business loan from a bank.  I thought this choice might be the most straightforward way to finance my startup. But, given the market environment in 2009, the banks had very strict lending rules for businesses and in all but a few cases they would only extend loans to businesses that were generating revenue.  As a startup, this immediately disqualified me from exercising this option. Next.

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Free Credit Check & MonitoringI also considered using my credit cards. While I didn’t like the idea of running up credit card debt, it was a viable option I wanted to consider. After all, my credit cards were wide open and provided me with instant access to the cash I needed. The downside was too great, however. The credit card APR was 25%. Additionally, I had to contend with the reality that I would be immediately creating another bill for myself while I was still in school. And not just any bill — if I didn’t pay it, I could ruin my good credit score, and I didn’t want to mess up what I had worked so hard to achieve. I quickly decided against this idea.

Utilizing my savings was the third choice on the table. So, remember what I said about not being flush with cash? It’s true — I wasn’t a mini-Warren Buffet while in school. But, I did have a significant savings.  Prior to business school, I had taken full advantage of my employer’s savings plans including matching options and flexible savings accounts. I knew I could use this money, but how much of it did I want to use? Since saving for the future is paramount, I knew I couldn’t treat my savings as a blank check — even for the purpose of furthering my business.  I needed to be strategic.

The final option: using some of my student loan money to finance my business. While this is not a traditional option, it happened to be a great opportunity. My student loans had a 6.8% interest rate — more than three times lower than the credit card rate. While my classmates used their student loan checks to pay rent for posh apartments, I lived meagerly and allocated some funds for my business. Additionally, borrowing from my student loan didn’t create an immediate bill for me.

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Given the $10,000 I knew I needed, I decided to take $5,000 from my savings and $5,000 from my student loans. For the first year of school, I maxed out my student loan amount. For the second year, however, I did not max out my loans; I was keenly aware of how much debt I would be able to service upon graduation.

Though this option worked for me, I’m not suggesting you enroll in school simply to have access to student loans as a funding source for your business. Additionally, many lenders do not want you to use the loans for anything other than tuition or school related expenses. So, if you’re not in school or you don’t want to use your loan money this way, here are a few more alternatives:

  • Secure personal donations. Ask family and friends to donate and provide funds to you or your business. Create a loan for friends, family, colleagues, etc. Lendfriend.com is a great source for drafting the documents you need.
  • Launch a Kickstarter campaign. This is a popular resource that allows you to reach your entire social network. And, if you get enough traction, you have the opportunity to reach far beyond your network.
  • Get a second job and use the income solely to fund your business.

Clearly, there are many options to finance your business. The key is to determine which choices make the most sense for you. Here are a few key takeaways:

  • Begin by considering every option available to you.
  • View your choices in concert with each other and see if there is any way you can leverage one option to make another one more attractive.
  • Be flexible in your thinking and stay open to alternate possibilities.

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Image: iStockphoto

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  • Paul

    I have some problems with the info in this article. She says that assuming she used her credit cards that “I could ruin my good credit score.” However, her credit card interest rate was 25% which indicates that her credit score was not particularly good. Since the article was about personal finances, the author needs to be a bit more forthcoming about her financial situation.

    • Tommy

      Actually, I have a really good credit score (+750) and my credit cards still have rates above 20% because I got the card years ago. I think the info Charisse provided is really helpful and smart because she is going after the lowest cost of funding. She’s given great advice in the past and this is no different – she went out on a limb to share what she’s been doing and I find this refreshing for her to share details most people never share.

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