Starting a business is tough enough when you’re fresh out of school. Having a huge pile of student loan debt doubles the challenge.
The size of the average outstanding student loan debt has soared, rising 50% from 2007 to 2014 to nearly $28,000, according to the Ewing Marion Kauffman Foundation. But despite the growing debt burden, some determined grads are heading straight into entrepreneurship.
Is that a wise idea?
Starting a business is expensive. Once your company is a year old, you’ll find an array of small-business financing choices, but your options are limited when you’re brand new. You have to ask yourself whether entrepreneurship is a risk worth taking when saddled with student debt.
Ken Ruiz Hamada and Joanne Danganan have wondered the same thing. The pair, two of the co-founders of a company called Ombu, have struggled with the need to work versus the desire to pursue a dream.
They’re so passionate about growing their site for booking outdoor adventure trips that they want to devote all their energies to it, Ruiz Hamada says. But he says he is always reminded of his financial burden: “I have student loans and I can’t do that.”
NerdWallet asked some experts and entrepreneurs whether student loan debt and entrepreneurship are a good mix. Their observations hold four pieces of smart advice:
1. Be daring, but realistic
A love of the outdoors led UCLA students Ruiz Hamada and Danganan, along with co-founder Brandon Harper, to start Ombu.
Student debt hasn’t been an issue for Harper. But Ruiz Hamada will graduate from the UCLA Anderson School of Management in June with $80,000 in student loans, while Danganan, who graduated with a sociology degree in 2010, is still wrestling with student debt of $60,000 while working full time.
Recently, Ruiz Hamada took the leap. He says he saved up so he could quit his job and devote more time to the business — while also finishing up his studies. Right now, Ruiz Hamada says he maintains “this delicate balancing act between my finances and chasing this dream.”
Meanwhile, Danganan pursues her passion in her spare time. Her advice to new grads looking to start a business but struggling with debt: Go ahead and pursue the idea; there’s never a perfect time. But keep your day job if necessary. “Make sure you don’t risk your finances being ruined,” she says.
2. Be creative with financing and stay lean
Student loan debt can hamper your hunt for capital. Consider refinancing your student loan if possible, which won’t eliminate your debt but may ease the burden.
Student debt hanging over your head will likely make potential investors and lenders think twice about financing your small business. Danganan and Ruiz Hamada had to tell potential investors, “We will need to include salaries as part of the investment,” he says. Consequently, some investors passed: “Early-stage investors often don’t like paying for salaries.”
There are other ways to raise money, of course.
“Hitting up friends and family” is one, says Margaret Paddock, senior vice president at U.S. Bank. Crowdfunding is another increasingly popular tactic, especially if you have a product or service that you feel could could draw a lot of attention.
Whatever financing strategy you embrace, Paddock says, you must have a solid financing plan for your business and “keep your expenses really, really low.”
Remember that you have advantages as an aspiring entrepreneur fresh out of school, she adds.
“You tend to be more nimble,” she tells NerdWallet. “You have fewer responsibilities, like a family or a big mortgage. You have the ability to live simply.”
3. Surround yourself with experts
On the other hand, you lack experience. That’s why Paddock encourages young entrepreneurs to seek out people who can help.
“Surround yourself with advisers and experts,” she says. Go to conferences and other events where you can find business owners who are willing to mentor and share. “Don’t be afraid to ask,” she says. “A lot of people are so determined to do it on their own — it’s OK to ask.”
Think about organizations that can help, including the U.S. Small Business Administration, local chambers of commerce and academic institutions.
For example, Penn State’s Smeal College of Business, with help from alumni, is setting up a fund for students who want to start a business. Shawn Clark, a professor of innovation and entrepreneurship, says the goal is to help them “move their ideas forward despite their student loans.”
If you’re weighed down by student loans, he says, “you’re less likely to think about entrepreneurship. … It kills off the initial decision-making process.”
A 2015 report by Smeal and the Federal Reserve Bank of Philadelphia found that enormous student debt burdens have hampered would-be entrepreneurs.
4. Think long term
Here’s a sobering thought about starting a business: Many of them fail. But when you’re just out of school, you’re starting a journey in which failure is not only natural but may also help you in the long run.
James Wang, who just got his MBA from UC Berkeley’s Haas School of Business, has what he calls “a decent chunk” of student loans, but that didn’t stop him from joining a team in starting a business — one that by its very nature makes it more difficult for the company to get financing. He and his co-founders had serious intentions when they came up with a new type of vibrator. They felt that vibrators were being marketed to men “to spice things up” rather than to address the needs of women. They set out “fix those issues” and build a successful business.
The entrepreneur says he thinks about his student loan debt even as he’s building his business, “especially since startup life doesn’t pay well.” But at this stage of his life, he tells NerdWallet, “I should be investing in the most enriching experiences possible, where I can learn as much as I can — after all, most of my earning potential is still in front of me.”
“No matter what happens, I do think all the things I’ve been able to experience, learn and build have made it worth the opportunity cost,” he adds. “There are fairly large potential returns both intangible and financial.”
To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.