25 years old and deep in debt

[crazy canuck]

It sort of fits with the MFA, I guess.

Assuming they want a laser cutter that cuts relatively small pieces of plastic we are not talking about a lot of money here, something in the range of $5000. (assumption 1)
I think that assumption is sound looking at the pictures and descriptions - they are plastic doodads and small enough to fit on a cupcake.

From a banks POV, whether they have 150K in student debt or none at all doesn't matter much; either way they have no collateral.  The bank is going to evaluate this as a loan to the business, secured by the laser cutter, which presumably carries some decent resale value.  (assumption 2)

If they can show a good track record of sales and profits on those sales AND if they can show their order flow supports expansion, they have a decent chance of getting that loan.  And if the bank balks due to risk, they can always go to the SBA.  That involves a lot of PITA paperwork but it can work.

So either:
+ the business isn't strong enough to support the loan, or
+ the local banks in Maine are all very nervous and this couple for some reason can't deal with the SBA application process, or
+ they haven't tried that hard to get the business loan, or
+ there is some other factor at play not mentioned.

I've never tried to take out a small business loan, but it strikes me that with a start-up business with essentially no assets, the banks might require the principals of that business to make loan guarantees on behalf of the business. Being deep in debt may prevent the bank from accepting loan guarantees from them.

Yeah, the only thing the bank is really going to be concerned about is collateral vs personal debts of the guarrantors.  In this case, after their debt load is taken into consideration, they probably didnt have the collateral to secure small amount they needed (using JR's assumptions).

[Jacob]

I've never tried to take out a small business loan, but it strikes me that with a start-up business with essentially no assets, the banks might require the principals of that business to make loan guarantees on behalf of the business. Being deep in debt may prevent the bank from accepting loan guarantees from them.

I expect it varies from place to place, but what I've been advised - and what little I've seen myself - small business loans from banks are not useful for start ups. The banks are simply too risk averse.

Either you have the financial substance to personally guarantee the loans anyhow - but using your line of credit or a second mortgage makes it essentially a personal loan.

Alternately, you're the kind of person whose personal history (family, connections, education, social skills) and rock solid business plan means that you may convince the bank to lend you money; but if you have all that, you're likely to be able to secure venture capital or friends & family funding, on better terms than the bank.

... but most likely, the bank won't even look at you until you don't need their help anymore.

[merithyn]

I've never tried to take out a small business loan, but it strikes me that with a start-up business with essentially no assets, the banks might require the principals of that business to make loan guarantees on behalf of the business. Being deep in debt may prevent the bank from accepting loan guarantees from them.

This was most definitely the case with the toffee shop.

[Jacob]

Yeah, the only thing the bank is really going to be concerned about is collateral vs personal debts of the guarrantors.  In this case, after their debt load is taken into consideration, they probably didnt have the collateral to secure small amount they needed (using JR's assumptions).

Which actually supports the article's point.

The heavy student loan burden makes the kind of personally guaranteed small loans that are often crucial to get a small scale entrepreneurial business up and running out of reach for practically a whole generation.

[The Minsky Moment]

I've never tried to take out a small business loan, but it strikes me that with a start-up business with essentially no assets, the banks might require the principals of that business to make loan guarantees on behalf of the business. Being deep in debt may prevent the bank from accepting loan guarantees from them.

personal guarantees are almost always required.
But the amount of debt is not going to matter for that purpose if there are no assets.
I.e. from the banks perspective, 0 assets, 0 debt is not much better for guaranty purposes than 0 assets, 140k debt.  Either way, there isn't anything to collect on.

[Savonarola]

It sort of fits with the MFA, I guess.

Assuming they want a laser cutter that cuts relatively small pieces of plastic we are not talking about a lot of money here, something in the range of $5000. (assumption 1)
I think that assumption is sound looking at the pictures and descriptions - they are plastic doodads and small enough to fit on a cupcake.

From a banks POV, whether they have 150K in student debt or none at all doesn't matter much; either way they have no collateral.  The bank is going to evaluate this as a loan to the business, secured by the laser cutter, which presumably carries some decent resale value.  (assumption 2)

If they can show a good track record of sales and profits on those sales AND if they can show their order flow supports expansion, they have a decent chance of getting that loan.  And if the bank balks due to risk, they can always go to the SBA.  That involves a lot of PITA paperwork but it can work.

Suddenly I understand how people can spend three years writing their doctoral thesis on minor characters in Jane Austen novels.

So either:
+ the business isn't strong enough to support the loan, or
+ the local banks in Maine are all very nervous and this couple for some reason can't deal with the SBA application process, or
+ they haven't tried that hard to get the business loan, or
+ there is some other factor at play not mentioned.

I can't access the article anymore, but I don't think they tried for the loan at all.  They don't think they can afford both payments for their student loans and for their business loans.

[The Minsky Moment]

Part of the issue may be that finding good subjects for an article like this is tough.

Take JR's (I think valid) points regarding those who start their own businesses not staying in school so long. A budding entrepreneur has a few options to stay in JR's good graces:

a) forgo education: if the business is successful, then the subject makes education seem unnecessary. If the business fails, the subject looks like just a random uneducated dropout.
b) forgo being an entrepreneur. I'm sure that is what many professionals have done. Random office drone #956482 bringing home a decent paycheck probably has made peace with his decision, and in any event the opportunity loss to the person (and the economy) isn't obvious.

I don't make the rules.
As a society, we celebrate the entrepeneur.  And indeed society as a whole benefits from new business generation.
But from the perspective of the individual, the risks of failure are considerable.  Keynes observed that venturing activity is essentially irrational as a sound risk calculation (hence the need for "animal spirits) and he had a good point. 

You can lower the cost of entrepeneurship or take the sting out of failure but at the cost of loosening the discipline of the market test.  During the late 90s there was something of a natural experiment along those lines as young people with no experience found that they could get new business ventures funded simply by saying ".com".  Some of those ventures succeeded but many failed quite badly due to poor business plans and lack of execution.  What the overall impact was on the economy is open to question.

[Malthus]

I've never tried to take out a small business loan, but it strikes me that with a start-up business with essentially no assets, the banks might require the principals of that business to make loan guarantees on behalf of the business. Being deep in debt may prevent the bank from accepting loan guarantees from them.

personal guarantees are almost always required.
But the amount of debt is not going to matter for that purpose if there are no assets.
I.e. from the banks perspective, 0 assets, 0 debt is not much better for guaranty purposes than 0 assets, 140k debt.  Either way, there isn't anything to collect on.

Fair enough, makes sense to me. Zero is the same as -140K, because either way, you won't be paid back.

[garbon]

YOLO

Never understood that reasoning.  If you only live once, surely that's a reason to be careful with your health and money?

Apologies if someone already posted this. I'm just getting caught up on the day.

https://www.youtube.com/watch?v=z5Otla5157c

[The Larch]

YOLO

Never understood that reasoning.  If you only live once, surely that's a reason to be careful with your health and money?

Apologies if someone already posted this. I'm just getting caught up on the day.

https://www.youtube.com/watch?v=z5Otla5157c

I did.  No apologies needed, though. 

Btw, my entrepreneur-y friends (Shameless plug: http://www.customeeple.com/) bought a laser cutter a few weeks ago, and they didn't need a loan, so they can't be *that* expensive.

[garbon]

YOLO

Never understood that reasoning.  If you only live once, surely that's a reason to be careful with your health and money?

Apologies if someone already posted this. I'm just getting caught up on the day.

https://www.youtube.com/watch?v=z5Otla5157c

I did.  No apologies needed, though. 

Btw, my entrepreneur-y friends (Shameless plug: http://www.customeeple.com/) bought a laser cutter a few weeks ago, and they didn't need a loan, so they can't be *that* expensive.

Google shows them running 2-6k.

[Ideologue]

Part of the issue may be that finding good subjects for an article like this is tough.

Take JR's (I think valid) points regarding those who start their own businesses not staying in school so long. A budding entrepreneur has a few options to stay in JR's good graces:

a) forgo education: if the business is successful, then the subject makes education seem unnecessary. If the business fails, the subject looks like just a random uneducated dropout.
b) forgo being an entrepreneur. I'm sure that is what many professionals have done. Random office drone #956482 bringing home a decent paycheck probably has made peace with his decision, and in any event the opportunity loss to the person (and the economy) isn't obvious.

I don't make the rules.
As a society, we celebrate the entrepeneur.  And indeed society as a whole benefits from new business generation.
But from the perspective of the individual, the risks of failure are considerable.  Keynes observed that venturing activity is essentially irrational as a sound risk calculation (hence the need for "animal spirits) and he had a good point. 

You can lower the cost of entrepeneurship or take the sting out of failure but at the cost of loosening the discipline of the market test.  During the late 90s there was something of a natural experiment along those lines as young people with no experience found that they could get new business ventures funded simply by saying ".com".  Some of those ventures succeeded but many failed quite badly due to poor business plans and lack of execution.  What the overall impact was on the economy is open to question.

And yet it's still a lot easier to fail as an entrepreneur than it is to choose the wrong kind of education, insofar as a personal guaranty involves some sort of basic underwriting and are dischargeable, neither of which features student loans possess.

[alfred russel]

I don't make the rules.
As a society, we celebrate the entrepeneur.  And indeed society as a whole benefits from new business generation.
But from the perspective of the individual, the risks of failure are considerable.  Keynes observed that venturing activity is essentially irrational as a sound risk calculation (hence the need for "animal spirits) and he had a good point. 

You can lower the cost of entrepeneurship or take the sting out of failure but at the cost of loosening the discipline of the market test.  During the late 90s there was something of a natural experiment along those lines as young people with no experience found that they could get new business ventures funded simply by saying ".com".  Some of those ventures succeeded but many failed quite badly due to poor business plans and lack of execution.  What the overall impact was on the economy is open to question.

I wouldn't say it is a question of lowering the cost of entrepreneurship beyond what some theoretical market test would impose. I'd argue that the educational and regulatory system we have today is significantly increasing the cost of failure. For example, I don't think soaring educational costs is just the free market at work---government action is having a significant impact.

[The Minsky Moment]

Ideologue, AR: I agree with the points that the current educational finance system in the US is suboptimal and that government action has contributed to that.
That also relates to my earlier post where I questioned the overall effectiveness and equity of the US tertiary educational system.
I don't think however that the critical symptom of that problem is a decline in entrepeneurial options among FMA grads in their early 30s.

[Ideologue]

I prefer to characterize it as government inaction.