It’s very important for small business owners to stay on top of their business’ income and expenses. However, many entrepreneurs tend to blur the line between their personal and business finances. It’s important to remember that your business is an independent entity, no matter how small-scale it is. There are many reasons why you need to separate personal and business finances, some businesses fall into bankruptcy just due to mishandling of finances leading them to seek for quick business loans or additional capital to sustain their business. In addition to this, here are four other reasons why you should consider doing so.
1. Credit Rating
Your credit rating determines your ability to obtain working capital for your business, including online business. The higher your business credit, the easier it is for your business to secure larger loans. If there’s no clear distinction between your personal and business finances, it’s harder for you to provide your business income to financial institutions. Most lenders also assess personal credit to determine loan eligibility because borrowers are usually asked to partially guarantee the loan. Similarly, a strong credit score means more borrowing power. In essence, your credit rating will play a role in determining what types of loan you can apply to. Other than that, it can dictate the terms of your loan, including the repayment period and interest rate. Generally, the higher your credit score is, the better your loan terms will be. Low credit scores will often result in higher interest rates and stricter loan terms.
2. Business Reputation
How you manage your company’s finances speaks volumes about your business reputation. Lenders, business partners, and vendors want to know that you’re serious about your business and whether it’s profitable or not (non profit organization). By having two separate accounts, you can establish your business’ identity, and therefore, improve your reputation. It also helps to apply for credit cards, checks, or a business line of credit since it helps to draw a clear line between your finances. Moreover, having separate accounts from which you draw payments will make your business look more professional to vendors and customers. In this way, you’ll give your business a chance to be taken seriously. It’s also a good way to get your brand out to the world and towards your target audience.
3. Cut Costs and Save Time
Business owners want to run their companies more efficiently. By separating your personal and business finances, you’ll be able to reduce billable hours, therefore saving a large amount of money. You have the option to hire an accountant or use a business accounting software to help you sort through your finances. In addition, proper financial management helps potential investors and lenders get a clear picture of your finances.
One of the biggest reasons to separate personal and business finances is tax benefits. When both finances are separated, you can take advantage of tax reductions, as well as writing off business expenses. It’s very important to maintain a separate and accurate record of your personal and business expenses when running your company. By doing this, you can save yourself from stressing over taxes. Additionally, a detailed list of your expenditures can help in the event you are audited by the IRS. If both your finances are intertwined, the IRS would most likely audit your business and personal records.
Tips to Separate Business and Personal Accounts
If you haven’t started separating your business and personal accounts yet, now is the perfect time to do so. Here are some helpful tips to get you started:
- Keep your business and personal accounts separated. No matter how difficult it can be, it’s important to make sure that the expenses are separated. This will also make it easier for you to go through in case the IRS has some questions regarding your business expenses during tax season.
- Consider incorporating. This can be a big decision to make but deciding to incorporate your business will lead to a lot of tax benefits. Other than that, it can also provide sufficient protection for your business assets. In case your business goes bankrupt, your personal assets won’t be affected.
- Apply for a business credit card and use that for business expenses. This will help you build your business credit. This is especially important for start-up businesses with lesser access to specific types of business loans. This will also help in streamlining your business finances so it’s easier to account for when the tax season comes.
- Pay yourself. This isn’t just for the sake of rewarding yourself, but it will help you separate business and personal profit. Other than that, having a salary for yourself will also help you stay on track of your personal budget. This way you won’t go on using your business’ finances for personal reasons.
By applying for quick business loans – especially a business line of credit, you’ll be able to automatically separate business and personal finances.