How to Start a Business—Even If You’re Drowning in Debt

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If you feel like debt is taking over your life, you need only take a look at household debt statistics from the New York Federal Reserve to see that you’re not alone. Student loan debt stands at more than $1.3 trillion, and credit card debt is on the rise.

However, even if you feel like you’re drowning in debt, you don’t have to give up your dreams of starting a business. In fact, I know what it’s like to start a business with more than $100,000 in debt hanging over your head. When I founded Student Loan Hero, my six-figure debt threatened to drag me down.

I got through it, though. And in the end, my business was successful enough that it helped me pay down my debt, eventually allowing me to become debt-free. Here’s how I took control and became an entrepreneur despite my debt—and here’s how you can, too.

1. Get your debt payments under control

The first step is to get your debt payments under control. In many cases, you might feel like you don’t have the monthly cash flow to build your business. Making your debt payments can take almost everything you have.

To free up cash flow and start building your business, consider different strategies for reducing your monthly debt payments, such as:

2. Consider income-driven repayment for federal student loans

One of the most frustrating things about student loan debt is the fact that sometimes servicers don’t share all the options. I ended up defaulting on my student loans, adding more than $33,000 in interest and penalties to my original balance, because I didn’t know my options.

The Consumer Financial Protection Bureau released a study last year that indicated that many borrowers don’t know their repayment options. If you have a low income and federal loans, for example, you might be eligible for income-driven repayment (IDR) plans. When you take advantage of one of these repayment plans offered through the Department of Education, your payments are capped at a percentage of your discretionary income.

Capping your payments frees up more money for you to invest in your business. Once the business is up and running and you see increased income, you can put more toward paying down your debt. Sticking with IDR can cost you a lot more in interest over the long run, so once you’re on more stable footing, tackling that debt is important.

3. Refinance student loans

If you have good credit, you might be able to refinance your private and federal student loans. Refinancing to a lower interest rate and longer terms can help you free up some monthly cash flow for your business.

Student loan interest is tax deductible, so it’s one way to lower your payments, reduce your costs, and get a tax break while you work on your startup. At Student Loan Hero, we offer a guide to help you figure out where to look for help when refinancing your student loans.

Refinancing your federal loans means that you could lose some of the protections that come with them. So, do your research and run the numbers. If you have a mix of federal and private loans, it can make sense to consolidate your federal loans while refinancing your private loans. Figure out what works best for your financial situation.

4. Consolidate credit card debt

Your credit card debt and its interest rates could be a huge problem when you’re trying to start a business. The average balance-carrying household owes about $16,048 in credit card debt, according to a ValuePenguin study. You can expect your credit card interest to be more than $1,000 a year, depending on your rate. That’s money that could be going into your startup.

One way to manage your credit card debt is to consolidate it. You can use a no-fee balance transfer to save on interest and make your debt more manageable. You can even get a personal loan at a lower rate, helping you get rid of credit card debt faster. Personal loans are an attractive choice because they are unsecured—meaning you don’t need collateral. Plus, credit card consolidation can also lower your monthly payments, freeing up money you can put toward your business.

If you have a home, you might be able to get a home equity loan to consolidate your debt. But that could put your living arrangement at risk if something happens and you can’t make payments. So, do your best to manage your debt payments using strategies that emphasize unsecured loans.

5. Look for ways to cut other costs

Once your debt payments are under control, look for ways to manage your other costs. I took a chance and moved to Southeast Asia in 2009 with a friend from college. We had a cool business idea and I wanted to stoke my entrepreneurial fire without spending a ton of money. The lower cost of living in Asia helped me better manage my cash flow so I could put more money into my business idea.

But you don’t have to move to another country to successfully start a business when you have debt. When possible, look for areas with a lower cost of living. It’s a myth that you need to live in Silicon Valley or Seattle to create a successful startup. In fact, getting out of those areas can be beneficial.

First of all, the cost of living is much lower outside those areas, allowing you to save money on housing, food, and transportation, and boost investments in your startup. Additionally, it’s easy to get caught up in what everyone is doing in startup-heavy areas. Getting out can help you think outside of the box and make the most of your creativity and innovative tendencies—without getting caught up in “doing it right.”

Even after I moved back to the U.S., I continued to work on cutting my expenses. One of the big things I did was decide not to buy a car. I biked everywhere, saving money on car maintenance, gas, and insurance costs. I also lived in a small apartment and slept on an air mattress for a time. When I decided to add furniture to my apartment, it was from Ikea.

See how you can reduce spending on groceries, entertainment, and transportation. The money you save can all be put into your business.

6. Build alternative income streams

Business success doesn’t come overnight. In fact, sometimes you have to try out more than one idea before one sticks. While you tinker with your startup, it’s not always enough to cut costs. Once you have your debt payments under control and you cut back on spending, the next move is to build alternative income streams.

After my first business idea was discarded, I founded Student Loan Hero in 2012. It wasn’t an immediate money maker, so I had to keep income coming in. I listed my apartment on Airbnb and freelanced. Others supplement their income by driving for Uber or Lyft. You can try other side hustles to boost your income.

It’s O.K. if you don’t want to cut costs and grow your income at the same time. However, I found that after getting my debt under control, combining these strategies helped me grow my business. As a result, my business flourished enough that I was able to pay myself and others a salary.

Don’t wait until you’re out of debt to start a business

It’s tempting to wait until everything is perfect to start your business. However, if you wait until you’re completely free of debt to begin, you might not ever make the leap. Sure, you’ll pay off your debt over time, but will you still have that energy and entrepreneurial fire? Or will you be bogged down with life, work, and other obligations?

At one point in my life, I was stressed out, drowning in my debt, and trying to figure out what to do next. Unfortunately, as I wallowed in those feelings, I felt myself losing my vision. My passion and drive were also depleted. If I had focused solely on getting rid of my debt before moving forward, then I might’ve ended up abandoning my business.

Instead, I made a change. I took a risk and decided to begin my entrepreneurial journey even though I had debt. It wasn’t easy, but approaching the situation from the assumption that I would make it work helped. I was able to get my debt under control, take steps to support myself while building my business, and eventually see results. Now, I’m the CEO of a thriving and growing company that, in turn, has allowed me to pay off all my debt.

Don’t let debt stop you from your entrepreneurial dreams. It’s possible to build a successful business even if you have debt. I’m the proof.

Read more about this at articles.bplans.com.

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