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Forbes
5 days ago
- Business
- Forbes
How To Start A Business While Having Personal Debt In 2025
How To Start A Business While Having Personal Debt In 2025 Americans are still betting on themselves in 2025, starting thousands of new businesses even as personal debt remains a heavy burden. According to the U.S. Census Bureau, more than 28,000 new business applications filed in April 2025 are expected to evolve into employer businesses (those with payroll tax obligations) within the following year. However, for many, this leap into entrepreneurship occurs while juggling credit card balances, student loans, or mortgage payments. In fact, a growing share is funding their ventures with personal debt. According to the 2024 Bank of America Small Business Owner Report, 28% of small business owners plan to fund their businesses using personal credit cards. This may be an alternative funding method, but one that carries a high financial risk. For instance, in the excitement of a promising idea, a new entrepreneur could launch an online shop (buying a domain, paying for web design, and hiring a photographer) all on her personal credit card. She might hope to hit the ground running and generate her first sales within a month. However, if delays arise and early revenue falls short, she may struggle to make minimum payments, potentially damaging her credit just as she begins seeking business financing. While entrepreneurial spirit remains strong, many are taking financial risks without a safety net. Can you realistically start a business while still carrying personal debt? The answer is yes, but it requires financial awareness, strategic planning, and intentional execution. Here are five expert-backed steps to help you build a business even if you're still paying off personal debt. Before you can map a path forward, you need to understand exactly where you stand. 'The first financial step is to perform a comprehensive review of personal finances and the business idea,' says Chris Heerlein, CEO of REAP Financial. 'You should review all current debt obligations, monthly income, and your monthly living costs.' This involves identifying your debt-to-income ratio, understanding and eliminating unnecessary spending, and determining whether you can safely allocate funds toward your business idea without jeopardizing essential financial obligations. Starting a business often requires a lifestyle shift and a reorganization of your financial priorities. When you are already managing personal debt (especially if it is high-interest or weighing down your cash flow), launching a business without a financial plan can quickly backfire. A business built without financial clarity risks becomes another liability instead of a source of freedom. Understanding the personal systems that support your entrepreneurial goals is just as critical as setting up business systems. This is where financial strategy becomes your foundation and not just another task in your business. Blending personal and business money may be the reality for new entrepreneurs. Still, while it can seem harmless in the early days, it is one of the fastest ways to create confusion, tax challenges, and long-term credit damage. 'You will want to have a plan of action to reduce your higher interest rate debt first,' says Heerlein, CEO of REAP Financial. 'It will also be important to have allocated your emergency fund for personal use and calendar in seed money for the business.' And I agree. Most of the entrepreneurs I work with have a mix of personal and business accounts and expenses that prevent them from separating, analyzing, and strategizing around their financial priorities. This kind of separation can begin by identifying the purpose of each purchase. If an expense benefits personal life (like groceries, streaming services, or household items), it should be logged and paid from a personal budget. Business-related expenses such as marketing, software, or inventory belong in a separate business budget. For example, a founder using the same credit card for both business supplies and weekend shopping might believe it is efficient, but over time, it creates confusion. Even when the payment method is shared, the budgets must remain distinct. That means maintaining two separate spending plans, each with its own starting balance, cash flow tracking, expense categories, and short-term financial goals. When personal living costs and debt obligations are prioritized first, whatever remains can be allocated for business growth. This separation helps clarify how much the business can truly afford to spend, and what needs to wait. Developing a Minimum Viable Product (MVP) is one of the most viable ways to balance launching a business with managing personal debt. While the MVP concept is often associated with tech startups or venture-backed companies, it is just as critical, if not more so, for founders who are self-funded or seeking to minimize financial risk. Launching lean is often a smarter path when personal debt is already part of your financial picture. It helps you validate your idea without making a big investment upfront. 'You may also experiment and pursue a strategy to set reasonable goals for the business and start very small with no major expense commitments,' says Heerlein. 'Thus, you will not burn too much cash and can shift your mindset and business approach as your financial position gets better.' This is the mindset behind an MVP: the simplest and most cost-effective version of your offering for a specific problem is the one you should go with to find your first funding, sales, or proof of concept. Before spending thousands on branding or infrastructure, you may ask: Can I offer a service version of my product? Can I sell through an existing marketplace? Can I build demand locally through referrals or small events? Some of the people who now have six-figure side hustles have achieved this with great results to show for it. Many entrepreneurs start by wanting to grow quickly, and so they allocate their expenses with that goal in mind. But when you are managing personal debt, that mindset must be balanced with intentional prioritization, covering your financial essentials while giving your business room to grow. 'In any case, you should maintain personal living expenses first before paying down debts,' says Heerlein. 'This ensures you don't adversely impact your credit status and incur penalty fees.' That means making sure your basics, like housing, food, transportation, and ideally more than just the minimum payments on your debt, are covered before directing funds into your business. Once those essentials are accounted for, you can begin to allocate cash toward startup costs. However, your focus should remain on preserving short-term solvency, ensuring you have enough liquidity to meet near-term obligations without relying on credit cards or triggering new financial stress. Whether you are paying yourself a small founder's draw or bootstrapping operations, the goal is to maintain access to working capital while avoiding premature cash depletion even if this may mean temporarily scaling back on discretionary spending in both your personal life and inside your business. When capital is limited, it can be tempting to rely on personal credit cards or take out high-interest personal loans to fund your business. But doing so often compounds your debt burden, making it harder to gain financial traction. 'At all costs, avoid high-interest personal loans and do not pay personal credit card debts with business expenses,' warns Heerlein. 'It creates more personal financial burden and will not give you further leverage in your business.' If additional funding is necessary, the goal is not just to access capital, but to access it strategically. Look for low-interest, flexible financing options like SBA microloans, community lenders, or CDFIs that support early-stage entrepreneurs, particularly those from underserved communities. Other funding alternatives may also be viable. For example, grants can serve as a strong source of non-dilutive capital, particularly for mission-aligned businesses or founders from underrepresented groups. Additionally, crowdfunding could be a feasible path if you offer a tangible product with clear value. For founders in high-growth industries, equity-based funding should be considered; however, proceed with caution. Giving up ownership too early or under pressure may limit your control in the future. The bottom line is that personal debt remains a significant aspect of the financial equation for many. To succeed and avoid harming your personal financial health, a clear structure and commitment to intentional financial actions are essential. From assessing your financial situation to choosing funding wisely, these five steps provide a roadmap for those looking to start a new business while managing personal debt.
CNET
07-05-2025
- Business
- CNET
The Fed Didn't Touch Interest Rates, but Your Credit Card APR Could Still Go Up. Here's Why
The Federal Reserve held interest rates steady for its third consecutive meeting on Wednesday, so don't expect lower interest rates on your credit cards anytime soon. But amid the looming impact of tariffs and an uncertain economy, your card's APR could go up. The Fed left interest rates at a target range of 4.25% to 4.5% in response to a growing uncertainty in its economic outlook. Both inflation and unemployment are at a higher risk of increasing, depending on how tariffs play out, Fed Chair Jerome Powell said at a postmeeting press conference. "There's so much uncertainty about the scale, scope, timing and persistence of the tariffs," he said. "The current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments." Although the federal funds rate only directly dictates lending between banks, the central bank's monetary adjustments are passed on to consumers, affecting financing rates on loans and credit cards. Borrowing rates for consumers have been high in the past several years, despite three interest rate cuts last year. Some experts still expect cuts in 2025, but it'll depend on how the economy continues to react to things like tariffs, inflation and unemployment. Interest rates affect how much it costs to borrow money, including how much you pay in interest for credit card debt. While the Fed's decision may not change your credit card interest rate anytime soon, other factors could. What is APR? Your credit card's annual percentage rate, or APR, is the rate at which your card balance accrues interest over the course of a year. Your balance actually accrues interest daily, but the APR is how much your balance will grow annually. What else affects your credit card APR? Raising or lowering the federal funds rate -- the overnight interest rate between banks -- creates a domino effect. Credit card issuers often follow the Fed's lead, increasing or decreasing their APRs. That, in turn, affects how much it costs you to carry an outstanding balance. What else affects your credit card APR? Credit card companies may align with the Fed when it lowers or raises interest rates, but other factors can also affect how much you pay to borrow: Banks tighten lending in fear of a recession. Despite the Fed holding rates steady, banks aren't bound by this and could opt to raise borrowing rates to ensure they still get their money even in times of economic hardship. Despite the Fed holding rates steady, banks aren't bound by this and could opt to raise borrowing rates to ensure they still get their money even in times of economic hardship. Your credit score. Your credit score indicates to lenders how likely you are to repay money you borrow. A lower score could lead to a higher interest rate if the borrower doesn't think you'll pay it back. Your credit score indicates to lenders how likely you are to repay money you borrow. A lower score could lead to a higher interest rate if the borrower doesn't think you'll pay it back. Your payment history with the lender. If you have a history of late or missed payments, your lender may hit you with a higher penalty APR of 29.99% or more. If you have a history of late or missed payments, your lender may hit you with a higher penalty APR of 29.99% or more. Type of purchase. Different purchase types may charge different interest rates. For example, if you use a cash advance (don't do this) on your credit card, the APR will be much higher than for a standard purchase. Your card issuer is currently required by law to alert you 45 days ahead of any changes in your card's interest rate for new purchases. "Card issuers can raise rates with 45 days' advance notice, but typically that applies to new purchases, not existing balances," said Gerri Detweiler, a credit expert and CNET Money Expert Review Board member. "There are also limitations on raising rates on existing balances; usually you must be at least 60 days late." However, those rules could potentially change. "In the 2008 downturn, it was still legal for issuers to raise rates on existing credit card balances, and many did," Detweiler said. "Watch notices from your card issuers that could signal a rate increase. In addition, some card issuers cut credit limits." The Consumer Finance Protection Bureau implemented many of the credit card and banking regulations that were introduced following the 2008 financial crisis. However, President Donald Trump gutted the CFPB, essentially dismantling the government agency created to protect borrowers. Many rules and regulations have already been unwound, so stay alert to any changes to your credit card terms. What's a good credit card APR? The average credit card APR is over 20%, according to the Federal Reserve. So anything below the average might technically be considered a "good" APR by comparison, but any APR means you're paying interest on an outstanding balance. Therefore, the ideal APR is 0%, where you don't pay any interest on your balance. There are credit cards that offer that perfect rate, albeit only temporarily, but we'll get to that in a bit. And while your APR won't be going down due to the Fed's decision this week, that doesn't mean you can't contact your issuer to ask for a lower interest rate. Depending on your relationship with them, they may grant your request. Even if they deny it, there wouldn't be any repercussions for asking. What can you do to pay down your debt without a lower APR? You don't need to wait for a lower interest rate to start to pay down any existing credit card debt. In fact, to avoid interest charges entirely, focus on paying off your statement balance in full each month. Take it card by card "It's often helpful to tackle one card at a time, while continuing to pay at least the minimum amount on the others," Detweiler said. There are generally two prominent pay-off strategies, the debt snowball method and the debt avalanche. The former has you pay off the smallest balances first, while the latter prioritizes the balances with the higher interest rates. "For some people, they get motivated by erasing a balance so paying off the card with the lowest balance is the best approach. Typically, though, you'll save the most money in the long run by paying off the card with the highest interest rate," she said. Make bigger payments You might not have enough to pay off your credit card this month (or next), but making more than the minimum payment each month can help reduce your balance quicker. A smaller balance means less interest accruing each month. Even if you're just paying the minimum on one card so you can allocate a higher monthly payment to another, the more you can put toward the balance, the better off you'll be. Use a balance transfer credit card Depending on your credit, you could also try to apply for a balance transfer credit card. These cards have an introductory APR of 0%. You can transfer the balance from your card that's accruing interest to the balance transfer card and work on paying the balance down without it growing. These cards offer 18 to 21 months of no interest, but they often require a balance transfer fee. This fee generally costs 3% to 5% of the transferred balance. While no one likes paying a fee, it's typically much better to pay this one-time fee than continue paying interest on your other card. However, these cards typically require good to excellent credit to qualify. Consider a personal loan You could also try for a personal loan. Personal loans typically have much lower interest rates than credit cards -- 7% compared to 20%, although terms often depend on the length of the loan and, again, your credit history. If you can get a lower interest rate than your credit card APR, use the loan to pay off your card, and then work to pay down the personal loan quickly. However, if you take this route, you may want to apply sooner rather than later. Given the current economic outlook, lenders could begin imposing stronger restrictions on loans.
