How To Guides

The 45 million Americans with student loan debt can make it more difficult for entrepreneurs to qualify for small-business loans. Your credit score and debt to income ratio can be affected by student loan debt. These are two factors lenders use when assessing a borrower’s likelihood of default. It is possible to get a loan for a business with student debt.

David Canet is the managing director of ConnectOne Bank’s SBA Lending Group.

Although the requirements for business loans vary from lender to lender, these guidelines can be helpful to entrepreneurs who have student debt.

proving that your company has enough cash flow to pay off business loans can be difficult for entrepreneurs, especially students.

Canet says that your business’s cash flow should be sufficient to pay for personal expenses such as student loans. Your debt-to-income ratio is a measure lenders use to determine your ability to repay a loan. Student loan debt can also impact your debt-to income ratio. Canet suggests adding a personal budget in your business plan. This will show that you have considered your personal financial obligations such as student loan payments.

Can student debt cancellation make things better? The short answer is: No.

“They are not likely to react much to all of the news about debt cancellation and stuff such as that,” Carolyn Katz, a SCORE mentor who assists small-business owners in applying for loans, says. It is likely that they will need to go above and beyond their pay grade .”

Consider including your entire balance in your budget for now.

Your credit score can be affected by student loan debt. Lenders will look at your credit history and see if you have made regular payments over the years. Katz says that if you haven’t made payments consistently over time, you’re not the only one. Katz has seen many entrepreneurs with negative credit reports, such as a late student loan payment.

It is important that you are honest about why your credit score has been affected. Katz explained that this will let the lender know you are a responsible borrower.

Develop your credit score by considering strategies. Desha Elliott is a local market manager at Accion Opportunity Fund (a non-profit lender and community development financial institution or CDFI) says that lenders will place more emphasis on other factors such as your cash flow and collateral.

Small businesses, even those with no student debt, are often denied credit by large, traditional banks. Entrepreneurs may instead look into local banks, credit unions, or CDFIs. These institutions often have a more personal approach to applicants and are more concerned with their character.

Elliott says, “We’re considering credit, collateral and character, as well as cash flow — and more specifically, your character and cashflow.” AOF can be more inclusive in loan approvals by taking into account the entrepreneur’s personal experiences and circumstances.

Canet also said that he values the applicant’s efforts, dedication, and commitment to their finances.

He recalls a borrower who, despite having significant medical school debt, was approved for a small-business loan. This was partly due to their ability to overcome difficult situations.

Predatory lenders who aren’t open about the true cost should be avoided by business owners who have difficulty meeting their typical business loan requirements. Elliott recommends that you examine the terms and annual percentage rates of any loan offers before accepting them. He also suggests finding out if there are additional fees such as a prepayment penalty.

Carolina Martinez, CEO, Cameo, California’s statewide micro-business network, warns that if a loan offer sounds too good to believe, it most likely is.

Elliott advises that you take the time to evaluate any loan offer and to ask yourself, “Can I afford this payment? Can I do what I need with the money being lent?”

If it doesn’t, it’s not the right financing.

Martinez says that it’s just as important to be prepared to apply for the job as to choose the right product.

Entrepreneurs can use free resources such as coaching and mentoring from CDFIs and SCORE mentoring to optimize their applications and answer any questions they may have about lending.

“The loan application is an opportunity for entrepreneurs to pitch their idea, and the first impressions matter,” says Canet.

Katz says, “If you have a great business idea or an idea to grow your company, and you believe a loan would make sense for you,” Katz adds. Katz says, “Give it another chance.” Even if your application is rejected, she explained that lenders will often provide a reason.