If you’ve got some of your personal finances mixed in with your business finances, it might be wise to start considering the separation process.
When you start your own small business, it’s easy for your personal and business finances to become intertwined. You may have used some of your own savings to start your venture, or your side hustle has simply grown faster than you expected, and you didn’t get around to opening those business accounts.
Historically, many small businesses have had to keep their personal and business finances tied up together, as the only capital they’ve been able to access has been linked to their home loan or other personal assets.
“Small business owners using personal credit sources to fund their business has been born out of necessity,” says Nathan Watt, managing director of Watson & Watt, a Queensland-based accounting and tax advisory consultancy that specialises in working with small businesses.
“Banks, which historically have been the only source of finance for businesses, usually require an applicant’s house as security for a business loan, and that’s traditionally been the only option available to small business owners.”
But, thanks to new, business-focused alternative lenders, times are changing, which makes it an opportune time for business owners to consider ‘decoupling’ their personal and business finances. Here are four reasons why it might be smart to keep your business and personal finances separate.
1. It makes things easier
Beauty is simplicity, they say – and having your business finances all in one place and separate from your personal finances makes things a lot easier to both manage and assess. It enables you to set up accurate bank feeds into accounting software, making tax time a breeze for both you and your accountant.
“If you have your personal and business finances intertwined, you have to work out percentages of what’s deductible and what’s not, which creates additional work come tax time, and can mean you easily overlook things than could be tax-deductible,” says Watt.
2. You could save in the long run
Many small businesses in need of finance may have previously used their home loan to access funds. If you have your business finances in one place, it can be much more straightforward to access business finance.
And taking out business finance can be significantly more tax effective, too.
“While the mortgage rate may be good, paying off a business loan over 15 or 20 years will see that interest really rack up. On this note, considering the loan term is as important as the rate to ensure the true cost of the loan doesn’t skyrocket,” says Watt.
“If your finance is all in your mortgage, for example, it can result in it being less tax efficient as you’re being charged the interest on the principal over a far greater period of time than you would be if you take out standalone vehicle, equipment or business finance.”
3. It doesn’t dilute your personal wealth
If you have your business and personal finances wrapped up together, not only does it become trickier at tax time, it can also begin to dilute your personal wealth. A $5000 cash injection here, $2500 there and suddenly, your personal savings account looks rather depleted.
4. It builds your business’s credit history
Finally, if you use business finance, rather than your personal finance, to fuel your business, you’re gradually building your business’s credit history, which could be advantageous when in negotiations with creditors, or when you’re seeking further capital to grow.
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