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4 Reasons Why You Need To Separate Business And Personal Finances

Two individuals analyzing a financial graph displayed on a tablet.

Small business owners must stay on top of their business income and expenses. However, many entrepreneurs 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 you need to separate personal and business finances; some businesses fall into bankruptcy due to mishandling of finances leading them to seek quick business loans or additional capital to sustain their business. Also, here are the four other reasons you think you should consider doing so.

1. Credit Rating

Your credit rating determines your ability to obtain working capital, including online business. The higher your business credit, the easier to secure larger loans. If there's no clear distinction between your personal and business finances, providing your business income to financial institutions is harder. Most lenders also assess personal credit to determine loan eligibility because borrowers are usually asked to guarantee the loan partially. Similarly, a strong credit score means more borrowing power. In essence, your credit rating will play a role in determining the loan types 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 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 would like to know if you're serious about your business and whether it's profitable (nonprofit organization). Two separate accounts can establish your business' identity and 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. This will give your business a chance to be taken seriously. It's also an excellent way to get your brand to the world and toward 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 can reduce billable hours, saving much money. You can hire an accountant or use business accounting software to help you sort through your finances. In addition, proper financial expense management helps potential investors and lenders get a clear picture of your finances.

4. Taxes

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 and write off business expenses. Maintaining a separate and accurate record of your personal and business expenses when running your company is very important. By doing this, you can save yourself from stressing over taxes. Also, a detailed list of your expenditures can be helpful if the IRS audits you. The IRS will most likely audit your business and personal records if your finances are intertwined.

Tips to Separate Business and Personal Accounts

Now is perfect if you still need to start separating your business and personal accounts. 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 essential to ensure that the expenses are divided. This will also make it easier for you to go through if the IRS has questions regarding your business expenses during tax season.
  • Consider incorporating. This can be a big decision, but combining your business will bring many tax benefits. Other than that, it can also provide sufficient protection for your business assets. If your company goes bankrupt, your purchases won't be affected.
  • Apply for a business credit card and use that for business expenses. For example, a corporate card in Singapore will help you build your business credit. This will help you build your business credit. This is especially important for start-ups with less access to specific business loans. This will also help streamline your business finances, so it's easier to account for when the tax season comes.
  • Pay yourself. This isn't just for rewarding yourself; it will help you separate business and personal profit. Having a salary for yourself will also help you stay on track with your 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 can automatically separate business and personal finances.

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