Guest Post by Rotman MBA Catherine Macdonald
As school rolls around again imagine walking into a bustling atrium of students swarming around you to get to and from class. Next to the long coffee queue you spot two representatives from VISA smiling from behind their bright, compact information booth. The sole purpose for their visit to campus is to sign you and your fellow-students up for a shiny new credit card in addition to a free T-shirt, mug or gym bag. Of course, you didn’t get enough of those SWAG items during frosh week.
Now ten years out of school and working in a well-paid job with decent benefits and a car you find yourself reading about successful Toronto start-ups in the wee hours of the morning. What’s more is that your good friend from college, an engineer/PhD/all around whiz kid, has a great idea for a new carpooling app. So what’s stopping you from being your own boss? Fear? No of course not. However, accumulated debt and not using debt consolidation to reduce monthly interest payments to pay down your loans in full, well, that could certainly stop you.
In fact a recent study in the US, conducted by the Federal Reserve Bank of Philadelphia, highlighted just how important an entrepreneur’s personal debt capacity is in financing a startup business.
The Federal Reserve Bank of Philadelphia examined the impact of student loan debt on small-business formation. The authors found a “significant and economically meaningful negative correlation between changes in student loan debt and net business formation for…small businesses”.
Gaining access to capital in order to start a business is potentially compromised by an entrepreneur’s personal debt capacity. Student loan debt, which is difficult to discharge via bankruptcy, has shown to have lasting effects such impacting the ability of future small business owners to raise capital, according to the researchers. Specifically, the report cited a 17 percent decline in new firms with four or fewer employees in counties where education debt increased 2.7 percent over the last decade.
In addition, the Kauffman index for Startup Activityreported that although start-up activity rose in 2015, the share of 20 to 34 year old entrepreneurs has in fact declined from 34.3 percent in 1996 to only 24.7 percent in 2014.
It is not uncommon to hear about the growth in student loan debt in the US, with outstanding balance of the nation’s student loans growing by an estimated $3,055.19 every second according to Marketwatch.
However, the situation in Canada is no rosier. A few weeks ago, Statistics Canada released numbers that indicate the average undergraduate tuition in Canada this school year is $6,191, 3.2 per cent higher than last year. Moreover, Canada Student Loan Program reports that most students take about 10 years to pay off their federal debt. And while the amount owed to the federal government has been relatively stable, “the amount of private debt (owed to financial institutions, family and friends, and on credit cards) has increased significantly, especially for doctoral graduates”, according to Daniel Schwartz of CBC news. Private loan debt went from about $19,000 in 2005 to $40,000 in 2010, a 112 per cent increase.
That said, Canada takes number 2 rank in the world for entrepreneurial activity (on par with Australia) with about 13 per cent of the working-age population involved in early-stage entrepreneurial activity, according to Peter Josty Executive Director of Centre for Innovation Studies in Calgary. The Centre for Innovation Studies in Calgary, researched the state of entrepreneurship in Canada for the international Global Entrepreneurship Monitor in London.
As promising as this news is there are some caveats to note. The peak age range for Canadian entrepreneurship is 45 to 64. And although there remains a lot of activity among Canadians under age 45, the weak area Josty points to, in Canada’s entrepreneurial sector is in financing and creating opportunities for transformative innovation.
What can be done for creditworthy borrowers looking to start their own business and need the financial capacity to do it? Marketplace lenders like Borrowell have a solution for Canadians with 3 or 5-year term debt consolidation loans.
By combining several unsecured debts (student, credit cards etc) into a single, new loan may result in a lower interest rate, lower monthly payment or both. For example, Borrowell’s loans offer fixed interest rates, meaning that your regular monthly payment will never go up. Your fixed monthly payment also helps pay down your loan balance – so at the end of the 3 or 5 year term, your debt consolidation loan will be fully paid off. Moreover, there are no prepayment penalties for paying off this loan early.
In the US, a marketplace lender Prosper, recently crossed $3 billion in personal loan originations through its platform, and has grown more than 350% over the past year as online marketplaces for credit gain mainstream awareness and acceptance. The Prosper platform offers consumers access to loans based on their personal credit for the purpose of debt consolidation, as well as for large purchases, medical expenses etc.
As a responsible credit tool, Borrowell’s Head of Growth Jeff Goldenberg explains, “our aim is to be a part of the solution to Canada’s debt problem, as our debt consolidation product allows users to lower their carrying cost on their existing debt.”
As long as you pay down the consolidated loan as soon as possible rather than spending the money that you free up, you can be on your way to debt freedom and starting the company of your dreams sooner than you thought.