If you’re a small business owner or entrepreneur mixing personal and business finances to support your business, you’re not alone. However, you could be complicating money matters and creating additional barriers within the current lending environment.
A recent survey of Kiwi small businesses, commissioned by small business lending specialist Prospa, found that when businesses need money, almost two in five (38%) business owners will dip into their personal savings for financial support*.
This is even more common amongst businesses less than two-years old, with 64% of these businesses saying that personal savings is their number one source of funding.
Mixing personal and business finances in the long run may do more harm than good. Here’s why you should keep your business and personal finances separate, and some tips to help you along the way:
Keeping things separate can build a strong credit history for both yourself and your business
While dipping into your wallet may give you a level of flexibility or feeling of control over your finances, a good history of repaying debt can provide you with the opportunity to build a strong credit history. This can work to your advantage when in negotiations with creditors, or when seeking further capital to grow your business.
Not only will this help your business’ credit score, but it also avoids risking your own in the process. This is more important than ever with the newly introduced Customer Contracts Consumer Finance Act (CCCFA), leaving Kiwis subjected to a highly critical eye when seeking a personal loan or mortgage, scrutinising purchases ranging from Friday night takeaways to counselling sessions.
By making your credit history a priority now, your future self will thank you in the long run.
Separating out your finances can help you avoid being personally liable for any business debt you take on
Intertwining your business and personal finances leaves you at risk of diluting your personal wealth, and could risk leaving your personal savings looking depleted.
Taking things further and leveraging your personal finance for your operation can be risky business, leaving assets like your home or car vulnerable and at risk of being repossessed. This can add a layer of stress to your life, on top of the already stressful challenges of running your business.
Alongside this, mixing the two makes things a lot trickier during tax time, as you have to put in extra work to figure out what’s deductible and what’s not. Keeping things separate will save you time (and potentially money) if you end up needing help from an accountant.
So how can you take steps to avoid blurring these financial lines?
Seek help from an adviser
As trusted sources, advisers are in a great position to help small businesses navigate their finances – especially for owners new to the game.
Advisers understand and are aware of the common unintended consequences of mixing personal and business finance on small businesses, and how this can play out in the current CCCFA environment.
Not only can they provide guidance on policy and regulation changes, they can help you understand good vs bad debt and the wider range of funding options available to help your business achieve its goals. A loan may not suit all businesses, but advisers can help assess your individual situation and may, for example, recommend taking on debt if you’re affected by seasonal cash fluctuations or if extra inventory is needed to fulfil forward orders.
Benefits of fit-for-purpose small business loans
While it may seem daunting, a loan can help relieve some of the financial pressure of running your business and allow you some extra breathing room.
Specialist small business lenders, such as Prospa, understand the struggles small business owners commonly face, and can offer support that meets the specific needs of your business. With minimal paperwork, funds often available within 24 hours and flexible repayment options (with no hidden costs), it can take a lot of the stress and guesswork out of this seemingly daunting process.
Separating your business and personal finances often prove to be a win-win situation, allowing your business (and credit score) to thrive without your wallet taking a huge hit. Interest accrued on your small business loan may also be claimed as a tax deduction, which is a massive win come EOFY.
*This survey was conducted online by One Picture between 27th January – 10th February 2022 amongst a sample of 525 small business owners in New Zealand with 1 to 50 employees.