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Getting a Business Loan With a Student Loan Debt

Is it difficult to get a business loan while you have student loan debt? It’s not impossible, but it is more difficult since lenders tend to approve applicants with a long, successful track record, strong credit, and low debt levels.

However, there are things you can do to increase your chances of approval of your business loan application.

In this post, we will discuss some of the best ways to get a business loan with student loan debt.

How To Get Business Loan If you Have Student Loan Debt

Increasing your credit score, reducing your debt-to-income ratio, or increasing your assets improve the chances of your business loan being accepted.

Furthermore, displaying important collateral (such as your business property) or taking advantage of alternative loan choices might help you get accepted.

But the easiest method to improve your chances of business loan approval is to pay off your student debt.

Business lenders usually require a debt-to-income ratio of 43% or less. As a result, if your debt-to-income ratio is greater than 43%, you’re almost certainly not going to be accepted.

It’s vital to remember that merely implementing one, two, or three of the ways mentioned doesn’t guarantee to obtain business loan approval.

Even if your other components are excellent, your credit score may be insufficient for it to be accepted.

Alternative Financing for Small Business Owners Who have Student Loan Debt

You can explore business financing alternatives, such as:

These forms of finance have lower credit requirements than long-term working capital loans and microloans since they are meant to be used for a limited time.

In comparison to traditional lenders such as banks and credit unions, online lenders are typically less strict.

But traditional business loan lenders demand lower interest rates than online lenders.

Business loans with shorter duration, smaller amounts, and higher interest rates are more likely to be approved. This is because:

  • Lenders demand higher interest rates in order to make larger profits, making them more willing to take on additional risk.
  • The amount of money that a lender may lose if you default is determined by the maximum loan amounts allowed.
  • Shorter duration gives the lender less cause to be concerned that your scenario will deteriorate and you’ll be unable to pay.

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How to Manage business loan with student loan debt

Taking on more debt comes with risk, especially if you already have financial problems.

This is why establishing an emergency fund, maintaining a budget, keeping your finances organized, and monitoring cash flows are even more important.

It’s also critical to recognize the distinctions between student and business loans.

Once you’ve decided, the various possibilities for managing both your business loan and your student loan debt will become more obvious.

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Business Loans vs Student Loans

Business loan payments are structured similarly to student loan repayments.

You borrow money for a set period of time and at a specified interest rate in order to make payments back over time.

However, there are several significant differences between them.

There are also grace periods for federal student loans, which have a set length after graduation before your first payment is required.

Federal student loans also come with a variety of repayment alternatives. The following are the 4 repayment plans of federal student loan repayment options:

1. Pay As You Earn Repayment Plan (PAYE)

The amount you pay each month will be 10% of your discretionary income, but it will never exceed the amount you would have paid under the Standard Repayment Plan.

2. Income-Based Repayment Plan (IBR)

Your monthly payments will be either 10% or 15% of your disposable income, with a maximum amount that is less than what you would have paid under the 10-year Standard Repayment Plan.

3. Income-Contingent Repayment Plan (ICR)

According to your earnings, you’ll be paid a monthly payment that is the lesser of 20% of your discretionary income or a fixed amount over 12 years, adjusted for inflation.

4. Income-Sensitive Repayment Plan

Your monthly payment is based on your yearly earnings, but the loan will be paid off in 15 years.

Despite their flexibility, student loans are notoriously difficult to get rid of in bankruptcy.

Hint: student loans are considered consumer debt whereas business loans are business debt.

It may have a significant influence on your financial management.

Keep in mind: When it comes to bookkeeping, you must repay company loans with business cash and pay student loan debts with personal funds for accounting purposes.

Business loans have no grace periods, but they may or may not be paid down gradually.

In addition, your only repayment choice on a business loan is the one specified in your offer.

Small business loans are also deferable, as with student debt. Deferment is typically only permitted for a restricted time and interest will continue to accrue on your loan.

Finally, business loans have considerably higher interest rates than personal student loans.

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Why Getting a Student Loan Is Much Easier Than Getting a Business Loan

Obtaining a business loan is considerably simpler than getting a student loan if you want to borrow more than $500K.

Government-sponsored aid programs are available to both types of loans, which cater to distinct financial goals.

The government is more inclined to underwrite a student loan for $50,000 if you need it (since you can’t hide from it until it’s fully paid off).

Because the repayment periods are different, the government would need to spend considerably more effort to underwrite a business loan for that amount.

To make it simple: It’s not worth their time to apply for a small $50K business loan. A $500K company loan, on the other hand, is something they’ll consider.

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Frequently Asked Questions