Should Wannabe Entrepreneurs Eliminate Debt Before Opening Their Doors?

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by Ryan

It’s estimated that 95% of businesses fail in the first five years (source). Not exactly phenomenal odds since they’re stacked against any entrepreneur who opens his or her small business doors. Considering the high rate of failure and the number of years it takes to build a substantial business, should entrepreneurs focus more on debt elimination before starting their business or go all in by taking the plunge while in debt?

Starting a Business While in Debt

The problem with starting a business while still in debt, whether it’s student loans, credit card, or even a mortgage would be the lack of capital access to get the business up and running. Limiting the amount of capital one could invest into the business limits opportunity for growth when opportunities are presented. An entrepreneur could start a small business, but not have the capital to properly market it and thus cause it to die a slow painful death where they wait for more customers to make more money, yet don’t have the money to get more customers. Much like the chicken or the egg dilemma.

The other problem is that the small business doesn’t have a cushion to allow it to weather storms influenced from the aggregate market or from like competitors. If a competitor enters into a price war with the business an entrepreneur without any cushion is going to have to fold. One could see from this that the businesses that make sense for entrepreneurs in debt may be ones that have minimal competition, low capital costs, and significant upside to make the risk worthwhile. Sounds like a dream business to me!

A few Possible Solutions

Reduce living expenses to the minimum – Live like a pauper and put your business first if you don’t have much money. Most likely time will be your great asset so leverage that into productive hours working on your business. Instead of marketing, prospect. Instead of hiring an employee to do the grunt work, do it yourself.

Keep working on the side – Pick up part time work on the side to pay your minimal expenses. This is currently my strategy. The downside is that you may hurt your career path, but as an entrepreneur minded individual you’d rather be poor than a cubicle drone anyways, so it might not be that big of a risk to you.

Start a business that doesn’t require much capital, such as a online businessOnline businesses are so ridiculously cheap that I’m surprised more people don’t take advantage of this. I listened to an interview with John Chow in which he asked what the internet marketplace would be like if online businesses cost $100k to start. There would be a lot more motivated people online and a lot less junk, that’s for sure. Just because it has low barriers to entry via cost, doesn’t mean it doesn’t have a huge upside potential if you treat it like a regular business. It’s a bit of a blessing and a curse at the same time. Any service business also has the potential to be started with low capital since your abilities are the product.

The Best Case

The plan works out and five years down the road your business is supporting itself and you’re doing as well if not better than if you’d not gone into business. You’re able to completely pay off the debt and make substantially more due to your success. However, that’s only if you’re in the 5% of businesses that don’t fail. Five years is a long time to stick it out and there will be a constant barrage of reasons why you could quit or why your business could fail.

The Worst Case

You could go deeper into debt and have a failed business which then removes the possibility of starting future businesses until your finances are back in order. You could lose a few years of income potential and aren’t able to contribute to any retirement portfolios thus losing out on some of the benefits of the time value of money. However, you will have the invaluable experience of starting a business from scratch, which can then be leveraged into a job or business down the road. If you play it completely safe you won’t have to worry about bankruptcy since you’ve decided to live significantly below your means.


If the entrepreneur is willing to fit a mix of living below their means, possibly working part time, and starting a low capital business starting a business while in debt, it might be a feasible option to start a business before eliminating debt. However, if they can’t keep up with the bills when the doors open, want to continue to go on trips to the Bahamas every three months, and engage in high capital businesses it might be best to clear the debts first.

What do you think? Should a wannabe entrepreneur kill their debt before taking the plunge?

Have you ever started a business while in debt? If so, how’d it turn out?

Image from Peter Kaminski

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{ 15 comments… read them below or add one }

Tom | Build That List March 1, 2010 at 1:19 am

I think keep working on the side is the best option for most people. I have taken that path myself and am slowly working on increasing my income enough to step away from my work and focus on my online ventures.
.-= Tom | Build That List´s last blog ..The 4 Reasons People Unsubscribe Mailing Lists =-.

Paul March 1, 2010 at 2:25 am


I agree with Tom, extra work on the side is probably the most favoured option but certainly not the only one. I’m sure with a little creativity, other sources of income generation could be found.


.-= Paul´s last blog ..Rocky Road =-.

LeanLifeCoach March 1, 2010 at 2:46 am

Most successful entrepreneurs I’ve known began their new companies as the side business and only quit their real job after their company was healthy enough to support them.
.-= LeanLifeCoach´s last blog ..Ban Antibiotics and Save Money =-.

Jeremy Johnson March 1, 2010 at 3:53 am

Wow, you guys are up late! And now I’m up early 🙂 Or maybe your time zone makes it look like you are up late 😉

If starting an online business, I say don’t kill your debit, just dive right in the deep end. Frustration and failure may occur, but it’s such a valuable learning experience. I’ve had a few websites ‘fail’ and even abandoned one many years ago that I should not have. It’s hard to look back on, but the lessons have really helped.

I still have a great deal to learn as is evidenced by how I’m changing my site still to hopefully find a mold that fits just right. But you’ve got to keep trying and tweaking until you get it. That’s what I love about online websites – tweak them from anywhere and collaborate with others so easily.

From you: “Five years is a long time to stick it out and there will be a constant barrage of reasons why you could quit or why your business could fail.”

I think if you spend five years and are constantly trying to innovate and find ways to add value, and reach out to others, and really put your mind to it, you should succeed enough to at least bring in more than the hosting cost of your website – probably more. If you can’t at least break even in five years, then something is definitely wrong 🙂
.-= Jeremy Johnson´s last blog ..Introducing The First Wizard, Lisa Irby =-.

Moon Hussain March 1, 2010 at 4:31 am

That’s a good question, Ryan. I would hate being in debt, so I’m more inclined to say that you should work on the side and pay it off slowly over the years as you’re building your business.

Do you really want to miss the market?

Each situation is different, so I’m not sure. How’s the Waikiki site coming along?
.-= Moon Hussain´s last blog ..My Massive Passive Income Brain Dump: What Do You Think? =-.

Investing Newbie March 1, 2010 at 5:23 am

When starting a new business, I don’t think capital is as important as timing. If the opportunity presents itself where you could exploit a market for profit, then I would probably not worry about my debt and try to leverage any capital I have/will have (through banks/venture capital firms). It definitely is a risky move, but I’m not sure if it is all crazy talk.
.-= Investing Newbie´s last blog ..Net Worth Update – February 2010 =-.

Money Funk March 1, 2010 at 10:49 am

Just what I was thinking about. I am about ready to implement a business of my own and was wondering about this subject. I know that I am NOT going to wait until I am out of debt. However, I am going to start small due to this. I will be starting online to keep costs down and the revenue generated online will go to fund bigger opportunities. Nicely written. Thanks for sharing your thoughts on this. 🙂

And about time you got yourself a twitter acct!
.-= Money Funk´s last blog ..Menu Plan Monday: 21-Day Vegan Kickstart! =-.

Search Engine Viking March 1, 2010 at 8:04 am

I’m all for living debt free, but the other side of the coin is that most people are looking for reasons NOT to get started (building their own business, writing the novel they’ve lamented on since high school or even asking out the coffee gal/guy that flirts every day). Waiting for a debt-free lifestyle before starting a biz might be another nail in the coffin. Analysis Paralysis.

At the same time, you can’t run a successful biz with negative cash flow. Unless you’re the CEO of the major airlines or national banks.

Can’t wait to see the “framed house” version of the Hawaii site.
.-= Search Engine Viking´s last blog ..What Is SEO? =-.

Little House March 1, 2010 at 9:03 am

You forgot one more strategy: Find a very support partner! Have them work a part time or full time job and support you in your business endeavors. She can slave away, while you build up the business. Think you can’t find a woman who would do this? Think again. I did this for my husband, and I’m not a pansy. I just really believed in him! I also knew that eventually it would be a better option that remaining, as you said, “a cubicle drone.”
.-= Little House´s last blog ..Wonderful Passive Income =-.

Derek March 1, 2010 at 11:18 am

Great discussion here! The level of risk that personal debt adds to a burgeoning entrepreneur can make the margin for error razor thin.

Interesting stats from the Census Bureau: 69% of new businesses start up for less than $10,000; 24% start up for $0. So, the idea that you need a huge bankroll to get your business off the ground is inaccurate.

I like the idea of starting the business on the side while still working out of debt. The temptation is to take all the money out of the business to pay off the debt (debt free = full-time business owner, right?) but I discourage that. I like leaving anything the business generates in the business until it’s creating enough that you can comfortably take a very small portion of profits to pay extra on debt.

I addressed a very similar question – whether to get out of debt first, then start a business – on my weekly talk show Past Due: Radio. Check out episode 94 Kids, Money & The Madness.
.-= Derek´s last blog ..094 Past Due – So, I Married a Financial Coach =-.

Valentina March 1, 2010 at 2:07 pm

Hi Ryan,
This seemingly simple question is not so simple. In my view it depends on what stripe of entrepreneur we are talking about and what the intended business is. The considerations swing wildly for someone wanting to open a fine dining restaurant for example, vs someone who wants to build an online business – both the risks and capital investment are worlds apart.

In my view wannabe entrepreneurs are not the stuff that real entrepreneurs are made of. A real entrepreneur typically does not make for a good employee, flies by the seat of his pants whilst taking calculated risks that deliver enormous returns or ruin. And if its ruin, he dusts himself off and starts all over again. An uber success in this category is Sir Richard Branson.

Ryan it seems to me that this post is pointed towards online entrepreneurship. Barring the brilliance of Page and Bryn, my suggestion for a wannabe entrepreneur would be

– keep the well paying day job (yes, cubicle and all)
– develop your online business on a part time basis (Ewen Chia worked 9 – 5, spent time with family & grew his online biz working 1100 to 3.00 a.m. ropes all the time.

At least this way the entrepreneur is not on the ropes financially and it is less stressful.

Debt … I believe that non-performing debt (debt that eats your assets vs debt that feeds your assets) should be systemically reduced whilst savings are increased (simultaneously, not get rid of debt first then start saving) …

Hmmm…. did I just end up rambling on over here
.-= Valentina´s last blog ..Blog Income Month in Review – February 2010 =-.

Michelle March 1, 2010 at 3:36 pm

I agree with Derek:

“Interesting stats from the Census Bureau: 69% of new businesses start up for less than $10,000; 24% start up for $0. So, the idea that you need a huge bankroll to get your business off the ground is inaccurate.”

I have found from experience that if you have a tighter budget with a start up you are more innovative and prioritize better. When my husband and I started our landscape/gardening business we quoted our first job with a empty van as we had no tools. We didn’t buy anything until it was evident that it was needed. For example we still don’t have a trailer, because we found we didn’t need one often enough to be worth buying, maintaining and registering one – rather we just rent one when we need one and pass on the cost to the client. On the other hand a friend started a similar business around the same time – went into major debt buying expensive flash bits and bobs (and a trailer!) and was out of business in 5 months and now is working for us with a huge debt on his back.
.-= Michelle´s last blog ..Feb 24, Why Do People Procrastinate? Steps to Overcoming Procrastination =-.

Kiesha @ Highly Favored March 1, 2010 at 5:00 pm

In my opinion, debt isn’t going anywhere, so if you wait to be debt free you might never start your business. However, that doesn’t mean you should go buckwild and go into even more debt to start a business. I think it’s wise to start small. Your online business advice is probably the best thing anyone can do. Right now “virtual estate” is the best low-cost investment area.
.-= Kiesha @ Highly Favored´s last blog ..Help-mate, not stale mate =-.

Ted @broketofree March 1, 2010 at 6:22 pm

Right now, my wife is starting a photography business on the side. Because we are in debt, we can pour a bunch of start up money into it so she needs to scratch and claw for every new peace of equipment it is tough. I want to get to a point where we can start or bankroll a business from a surplus of cash. That way, I am taking on the risk but not can take a long term approach for it. Ride the market until the business is profitable without worrying about a quick failure due to lack of capital. Now I just need cash.
.-= Ted @broketofree´s last blog ..The shame of debt =-.

Michelle March 2, 2010 at 12:10 am

The thing is you can always spend more money on a business!

Offline business is still going strong, with several employees. I would hasten to add we had the funding for equipment but didn’t commit to buying anything until it was obvious it was a need rather than be swayed by gimmicky products that just sound good! It also allowed us to grow in a different direction than we originally planned, and build our business on a stronger foundation.

Right now I am not very involved in our offline business, and my husband works on it part-time while we are carving out our “online real-estate”. Because we are planning an international move and we plan on having multiple income streams.
.-= Michelle´s last blog ..Feb 24, Why Do People Procrastinate? Steps to Overcoming Procrastination =-.

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