Business owners in this situation can find countless articles that itemize the individual steps they can take to keep the business funded while in personal debt. Most of them are obvious, like “find a partner with money” or “look for other sources of funding.” Those are great if you need a quick boost, but deeper changes are necessary to sustain you long-term.

The most effective way to deal with the problem of running a business while you’re personally in debt is to pay off your debt. Using a technique like the debt snowball strategy from Credello will accelerate that process. Getting a debt consolidation loan could free up extra cash that you can reinvest into the business. Conceptually, you’ll want to look at this in the following three ways:

1. Use your own money


Being in debt doesn’t mean that you don’t have savings or extra money lying around. If you’re meeting your minimum monthly payments on personal debt, it’s OK to use those leftover dollars to fund the business.

For owners still working a W2 job as you build the business, consider tapping into your 401(k) for a loan. That could get you going. Another example of using your own money is getting a part-time job or starting a side hustle to pay for business expenses.

Do this carefully because those extra hours could sap your energy levels, making you a less effective business owner. Certain ventures require full-time attention, especially in the start-up phase when you’re the only employee.

2. Apply for institutional financing


A high debt number could cause your credit score to go down, which affects your ability to get financing from banks and online lenders. You can take out a loan in the business name, but they’ll still want to check your personal credit history.

If your business owns physical assets, like equipment or real estate, you may be able to borrow against those. Does your business process credit card transactions? There’s a form of financing known as “factoring” where you can turn credit card invoices into immediate cash.

Businesses with longer payment terms, like net-60 or net-90, will often do this to keep cashflows stable. Your personal debt or credit history does not affect approval when you apply for factoring.

3. Take on a partner


Several of the online lists you read on this topic will tell you to “find a friend with some money.” That’s a terrible idea. If you can find a potential partner willing to invest in your business, it’s best that you have no personal relationship with them, i.e., friends or family. Inserting a monetary agreement in those situations can cause long-term personal damage.

Partners are easy to find if you have a solid business plan and the right business structure. Sole proprietorships don’t appeal to angel investors, but corporations do. Form a C-Corp and offer shares of stock in return for funding. If the business succeeds, you and the partner get paid. If it fails, the corporation can protect your personal assets.
If you can’t find a partner, there are other sources of funding.

These include crowdfunding sites like Kickstarter and SeedInvest, loans from banks or online lenders, bootstrapping (i.e., bootstrapped revenue), and angel investors. Bootstrapping is the slowest because you only use the money earned by the business to fund it; however, it can also be the most valuable method in certain circumstances. It’s another form of using your own money.

4. Sell some equity


Any time that you take on debt or give up any kind of ownership in your business, it should be something that you do with extreme caution. For example, if you need to borrow $5,000 to buy a $5,000 inventory order, think about how that would work.

It’s better to sell part of your company than risk bankruptcy or foreclosure on personal assets. Any time you invite outside investors into the company, understand that they’ll want a say in how the business operates.

That could affect future decisions and ruin any plans you have for future expansion. New owners may decide to call off expansion because it cuts into profits. Try bootstrapping first and see if you can generate enough revenue with fewer employees and overhead costs.

5. Collateralize debt


If profitable, consider leveraging your assets as collateral for credit cards or loans. It’s an effective way to finance growth and improve the business cash flow. If you own real estate, this is a safe bet because those assets retain their value even after the market declines.

If unprofitable, there are other options that may work for you depending on which assets you own. For instance, it might be beneficial to sell some of your equipment and use the proceeds as collateral for a loan with less stringent credit requirements than what banks or online lenders require. Just make sure that whatever plan you choose works before proceeding with anything permanent like selling equipment or signing over part of your company to investors.

6. Consider bankruptcy


If you’re completely out of options and can no longer afford to run your business, think about filing for personal bankruptcy protection. While that will cost you more in penalties and increased fees than if you had just closed your doors when cash flow began declining, it may be the only way to protect your assets and credit rating.

For most businesses, having cash on hand is always better than borrowing from a bank or another source. The above methods represent worst-case scenarios because they all have long-term financial repercussions that could affect the future growth of the business.

If you do find yourself in need of quick money for services or materials, there are credit cards and short-term loans that can help. However, those options should be used sparingly for emergencies only.

The bottom line: Making the right choice

Each of these suggestions has its pros and cons. Rather than get into them in detail, we’ll pose a simple question: How high is your tolerance for risk? Funding a business with your own money is only risking what you have.

Applying for a loan, factoring, or making promises to a partner requires greater intestinal fortitude. Do you have what it takes to do it? You certainly have nothing to lose by doing your research and weighing your options.