If you’re among the millions of people who took advantage of the student loan payment pause during the COVID-19 pandemic and you’re also a small business owner, you’ll need to be prepared for the upcoming restart of payments. When you’re growing your business, staying current on your debts will set you up for success, especially when you need to apply for more financing.
In this article, you’ll learn why you need to stay current on student loans, how to prepare for repayment, and steps you can take now to ease the repayment transition.
Student loan payments: Why they’re important for small business owners
The pandemic was unprecedented in many ways, including the pause on student loan payments for millions of Americans. Now, the federal government has determined that it’s time to restart repayments, with the first payments due in October 2023.
For small business owners, this is important on several levels:
- Federal student loan payments are a personal debt that you haven’t had to consider in regard to your monthly income for several years. Now, you’ll have to ensure that your monthly income from your business can cover this additional debt.
- When you apply for a business loan, your personal credit history is the primary consideration that lenders use to determine eligibility and approval. Making student loan payments is a great opportunity to build your personal credit score as you chip away at the balance.
On the other hand, anything that negatively impacts your personal credit score can also impact your small business loan application. If you don’t have enough income to cover all of your debt obligations, this can also make it more challenging to get financing to grow your business.
- The SBA requires potential borrowers to be up-to-date on student loan payments and a default on federal student loans can make you ineligible. If you fall behind on your student loans, then it can impact your ability to get SBA financing.
How small business owners can prepare for upcoming student loan payments
Here are three simple steps that you can take now to make it easier to start making your federal student loan payments:
1. Review your personal cash flow along with your business’s cash flow
The first step in preparing for upcoming repayments is to review your personal cash flow. This means reviewing how much money you personally get from your business each month and whether that’s enough to cover all of your personal debts, including student loans, as well as living expenses. If your current draw is sufficient, then you don’t have to worry as long as your business stays on track.
If you find you have a cashflow gap, identify essential business and personal expenses and prioritize them. Then make necessary adjustments to cut costs. Consider reducing spending on non-essential items , such as dining out or entertainment, and focus on maintaining financial health. By tightening your expenses, you can work towards managing your student loans more effectively and protect your small business’s stability.
2. Take advantage of financial assistance programs for student loan repayment
Thousands of borrowers used the REPAYE plan for their student loan payments, and now it’s being replaced by a new program, the Saving on a Valuable Education plan (SAVE). As with other income-driven repayment (IDR) plans, the SAVE plan calculates your monthly payment based on your income and family size. It will provide the lowest monthly payment of any IDR plan available and many student-loan borrowers with federal loans will be eligible.
If you currently participate in the REPAYE Plan, you’ll be automatically enrolled in SAVE. Otherwise, visit the SAVE plan website for information on how to enroll. For additional questions regarding your federal student loans, contact the Department of Education or use the resources on their website. Borrowers should have access to an online account with payment options and resources.
3. Prepare now if you anticipate a cashflow shortfall
Seeking advice from financial experts or loan servicers now can be helpful to create a sustainable plan for repayment. While you don’t want to borrow money from one source to make payments on another, having a reasonable cash cushion can allow you to cover necessary business expenses. Then you can find ways to create additional revenue streams or reduce expenses.
After speaking with your accountant and/or lenders, you could consider getting a small working capital loan or a line of credit for the business to help you for the short term. This will give you some wiggle room while you figure out how to sustainably reduce your business expenses and increase business revenue.
Whatever you decide, make sure you have a solid plan that you can put into action quickly, so that you don’t take on more debt than you can handle. Reputable lenders will help you avoid this scenario by reviewing your debt-to-income ratio. If a lender offers to loan you money without requiring a credit report or financial review, these are classic “red flags” for predatory lending – don’t fall for this. Instead, talk to Pursuit or your bank for options.
Beware of predatory lenders and scams
Scammers are constantly working to access your personal and financial information. Be diligent when you receive notices about your student debt. They could be scammers pretending to offer student-loan forgiveness. Communications should come from your lender and you could be cautious when you receive links and other potentially malicious messages. If a message seems suspicious, reach out to your student loan servicer first to verify if they sent it before responding.
Pursuit is here to help
Pursuit has helped thousands of small business owners in New York, New Jersey, Pennsylvania, and Connecticut get the financing needed to grow their businesses. If you find that you need working capital to increase your revenue-generating opportunities, take a look at Pursuit’s 15+ business loan programs, then contact us to learn more.