How Entrepreneurs Repay Their Debt
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UPDATED: Dec 9, 2013
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It is often easy to forget that entrepreneurs are just normal people.
They have the same problems and insecurities as other people. After all they are only human. Like non-entrepreneurs, they grapple with raising families, dating, weight loss, life goals, and, of course, debt.
Entrepreneurs have to repay their debts just like everyone else. Be it auto loan debt, student loan debt, personal loan debt, or business loan debt, entrepreneurs must divert some of their income to debt repayment lest they fall victim to default and debt collectors.
However, entrepreneurs have one card up their sleeve: their business.
Businesses generate cash flow, or at least have the potential to, that far exceeds what an average employee can. As the saying goes, “No one ever got rich off a salary” and rightly so because businesses, when successful, can be very profitable for their owners.
As many a small business owner has found, some of these said profits can be used to pay off debts.
A Debt-Free Small Business
Mike Glanz, Co-Founder and CEO of HireAHelper, borrowed a specific type of business loan called Revenue-Based Financing from Lighter Capital to start his company.
As implied by its name, Revenue-Based Financing is a business loan where payments adjust based upon monthly revenue.
“The interest rate could be up to 30 percent if we grew as much as expected with the new product, and we did,” said Glanz. “We used $250,000 from Lighter Capital to hire on developers and build the platform, and within 2-3 months we had sold the new product to multiple large partners. The increased revenue let us pay back the loan within 12 months.”
For many small business owners, the idea of their business becoming debt-free is closer to a fantasy than to reality. However, Glanz showed that it is indeed possible.
Hello SaaS, Goodbye Student Loan Debt
Some entrepreneurs begin their race to success with a disadvantage: they already have debt saddled on their backs. Indeed, with the amounts that colleges cost today, more and more new entrepreneurs will find themselves battling to both keep their business and personal accounts afloat simultaneously.
Chad Billmyer, CEO of Panjo, is a perfect example of this. Before launching his current endeavor, Billmyer founded an earlier company called Foresite Solutions back when he was a junior at Brown University in 2000.
Foresite Solutions was an early SaaS company that created applications for college financial aid offices.
Billmyer first began creating web-based applications for clients with a business partner. His first client was the financial aid office at Brown, which paid him to build an app that would improve the service of the Work Study program. After launching, many other universities desired to have the same type of app and the business took off. In four years, Foresite was cashflow positive.
“In 2005, Nelnet acquired Foresite,” said Billmyer. “I used the proceeds from the acquisition to pay off over $10,000 in student loan debt from my undergrad degree in Economics from Brown.”
Although his success allowed him to pay off his student loan debt, Billmyer doesn’t support the idea of indebted people starting businesses in order to pay off their debts.
“Starting a business to pay off debts is a terrible idea,” he said. “I don’t think most entrepreneurs start business to pay off debts. I think entrepreneurs start businesses to solve their own problems and problems faced by the world.”
Immediate success and lucky acquisitions are rare though. In fact, some entrepreneurs are left with few options aside from funding their businesses with credit cards.
Charging Up a New Business
Vladimir Gendelman, founder of a custom print materials business called Company Folders, started his business with funds from credit cards because it was difficult to get a business loan from a bank.
“Because it was a new business and there was no collateral, I wasn’t able to get a loan for basic needs such as a phone system, website, the software needed to run the business, and office equipment,” said Gendelman. “I was asking for $50,000.”
Using credit cards, he funded his business using $40,000 in credit card charges. Fortunately, these credit cards had zero-percent interest offers that allowed a year to a year-and-a-half to pay off any balance.
“Because I made at least minimum payments on every card, I had a good credit score and was able to leverage more cards one year later in order to transfer the balances and not pay interest again,” said Gendelman. “I kept on doing that until the end of 2007 when I paid everything off.”
For those willing to go down this path, he recommends looking for zero-percent credit card offers from banks with the longest terms possible.
“Try to create a schedule where you will pay off the amount in the allowed period of time, but if for some reason you cannot do that, there is always an option of transferring your balance to another card,” he said.
Even though Gendelman used the high-risk approach of credit card financing to fund his business, he ended up succeeding. Risk is inherent in business, and the initial financing aspect of business is no different. This is even more important for the entrepreneur who is burdened by personal debt, student loans, or commercial financing. As these entrepreneurs have demonstrated though, some quick thinking, determination, and creativity are all that is necessary for a successful business to pay off debt and reap hefty profits.