Have Student Debt? You Can Still Qualify for a Business Loan

There are 45 million Americans who have student loan debt, and for entrepreneurs, this can make qualifying for a small-business loan more challenging. Student loan debt can impact your credit score and debt-to-income ratio — two components lenders use to evaluate a borrower’s risk of defaulting. However, it is possible to get a business loan with student debt. 

“Many times, I would say half of our loans — more than that — have student debt,” says David Canet, managing director of the SBA Lending Group at ConnectOne Bank.

While business loan requirements vary by lender, these guidelines can help entrepreneurs with student debt navigate the process. 

Factor student loan debt into your budget

Proving your company has sufficient cash flow to handle business loan payments can be a hurdle for any entrepreneur, but especially those with student debt.

Your business’s cash flow must be able to support personal expenses, like student loan payments, on top of business loan payments, Canet explains. Student loan debt also affects your debt-to-income ratio, a metric lenders use to assess your ability to repay a loan. Canet recommends adding a personal budget to your business plan to show that you’ve put thought into your personal financial obligations, like student loan payments, in addition to business ones. 

Would student debt cancellation change things? Short answer: Not yet.

“[Lenders are] not probably reacting much to all the news about debt cancellation and stuff like that, just because it’s so complicated,” says Carolyn Katz, a SCORE mentor who helps small-business owners apply for loans. “For them to figure out who might get which amounts of debt canceled at what point is probably above their pay grade.”

For now, factor your full balance into your budget. 

Be transparent about your payment history 

Student loan debt can also impact your credit score, and lenders look at your credit history to see if you’ve made payments consistently over time. If you haven’t, you’re not alone, says Katz. Most of the entrepreneurs she’s worked with have something negative (like a missed student loan payment) on their credit reports. 

What matters is that you’re forthcoming about the reason behind a hit to your credit. This, Katz explains, lets the lender know that you understand what being a responsible borrower means.

Consider strategies to build your credit score, and expect lenders to put greater emphasis on other factors like your cash flow and how much collateral you have, says Desha Elliott, a local market manager at Accion Opportunity Fund, a nonprofit lender and community development financial institution, or CDFI.

Approach the right lenders

Large, traditional banks typically have the most stringent lending requirements, making it difficult for small businesses — even those without student debt — to qualify. Instead, entrepreneurs may want to explore their local banks, credit unions or CDFIs, which often take a more personal approach and place extra weight on an applicant’s character. 

“We’re looking at credit, collateral, character and cash flow — and more so specifically your character and cash flow,” says Elliott. Factoring in the entrepreneur’s personal experience and circumstances allows AOF to be more inclusive when it comes to loan approvals. 

Similarly, Canet says he considers the applicant’s effort, commitment and dedication on top of their finances. 

“Small-business lending at this level is never just brass tacks,” he says, recalling a borrower who was ultimately approved for a business loan despite significant medical school debt, in part because of their proven ability to overcome challenging situations. 

Review loan terms carefully 

Business owners who struggle to meet typical business loan requirements should be wary of predatory lenders that aren’t transparent about the true cost of borrowing. Before accepting a loan offer, Elliott suggests parsing out the annual percentage rate and terms, as well as finding out whether there are additional fees, such as a prepayment penalty. 

“If the loan deal sounds too good to be true, it probably is,” warns Carolina Martinez, CEO of Cameo, California’s statewide micro business network. 

With any loan offer, Elliott says to “take the time to assess, ‘Can I afford to make this payment and do what I need to do with the money that’s being lent?’”

If not, it isn’t the right financing. 

Seek expert support

“It is as important to be ready to apply as it is important to select the right product,” says Martinez.

Free resources, like SCORE mentoring and coaching from CDFIs, can help entrepreneurs optimize their application and prepare to answer any questions lenders may have.

“[The] loan application is the entrepreneur’s opportunity to make their pitch, and first impressions count,” says Canet. 

“If you have a good business idea or a good idea to grow your business, and you think a loan makes sense for you, don’t be put off because you have student loan or other debt,” says Katz. “Give it a try.” Even if you’re turned down, she explains, lenders often give you a reason why.