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How to Avoid Using Personal Funds to Address Your Business’s Financial Challenges in 2021

You’ve probably heard not to mix Business with pleasure, but did you know combining business and personal finances can be equally damaging? According to the Federal Reserve, 62% of firms have used personal funds to address their financial challenges in the last 12 months.

While dipping into your personal account may seem like a logical solution if your business is short on cash, it can backfire in multiple ways. In addition to making your cash flow more difficult to monitor, this practice could raise red flags with auditors, make you personally liable if your business gets sued, and ultimately damage your company’s value. 

Here are eight ways to separate your business budget from your personal bank account.

1. Apply for an employer identification number

Instead of using your personal social security number for business activities, apply for one that is specifically for your business. Your Employer Identification Number can be used for a range of business transactions including opening bank accounts, applying for licenses, and filing taxes. It can serve you in good stead even if you only intend on employing yourself. 

Bonus: It can also reduce your risk of taxpayer identity theft. 

2. Open a business bank account

A bank account dedicated solely to your company is important for establishing both your brand identity and a professional image. More than 80% of established small businesses have their own bank account, according to a Clutch survey. 

A business bank account can help you better manage your cash flow, track payments, organize relevant transactions in one place and stay within your budget. Opening your own business account may also make you eligible for a credit card, which you can use to pay for larger expenses if needed instead of having to dip into your personal funds.

3. Sign up for a business credit card

Once you open a business bank account, you should also be eligible to sign up for a small business credit card. You can use this card to make business purchases while also boosting your company’s credit score. Building credit over time is important as it can help boost your future eligibility for Small Business Administration loans, bank loans, or lines of credit. 

Just starting out and unsure what card to choose? Look for cards that have a 0% APR introductory period so you can enjoy some time interest-free. 

4. Give yourself a regular paycheck

To help establish firmer boundaries between business and personal finances, pay yourself a regular salary. This amount should be enough to cover your basic personal expenses and can also be factored into your company’s operating expenses as well as your overall business plan. 

A regular paycheck will help you stay on track, improve your chances of getting small business financing, and clearly show you where there’s more room to grow.

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5. Get creative through crowdfunding campaigns

Instead of using personal funds, consider running an effective Gofundme campaign for your start-up business. While the donation-based Gofundme is perhaps the most well-known of the crowdfunding platforms, you could also look into others. 

Some in the marketplace offer rewards in exchange for money, peer-to-peer lending from investors, or equity crowdfunding. 

6. Communicate regularly with your lenders

Whether you need to increase your line of credit, extend your monthly payment deadline or lower your interest rate, it’s important to get in touch with your lenders before your debt becomes insurmountable. 

Ask them to work with you and discuss all the possible options to make your repayment terms more manageable.

7. Consolidate your business loans

Consider applying for a Small Business Administration loan to consolidate all your debts into one monthly payment. Having to pay one creditor at a potentially lower rate of interest could help decrease your costs without affecting your credit score.

8. Enlist your partners’ support in setting a clear budget

One of the best ways to avoid pulling out more money than you can afford from either your personal or business accounts is by establishing a clear budget. Your budget should be based not just on your earnings and profit levels but also on input from your business partners and any family who are involved. To keep firm boundaries between your accounts, you should ensure all stakeholders are aware and respectful of the divide.

What if using personal funds is necessary?

If you have exhausted all other options, or plan to bootstrap your startup business, then dipping into your personal accounts or taking a personal loan for business expenses might be necessary. Generally, the use of personal funds for your business should be small and only temporary. 

As always, consult an accountant and/or a tax advisor to ensure you document and structure the funds properly — this will protect your investment in the long run and make things easier come tax season. Here are 3 key factors to keep in mind when using personal funds:

Evaluate risk

Before you dip into personal funds for your business, ask yourself: “Do I need this money for living expenses, retirement planning, or my emergency fund?” If the answer is yes, you may want to reevaluate your funding options, like crowdfunding. Using money that you need to make ends meet or cover emergencies can be too risky and puts a great deal of pressure on your business to succeed. 

Another risk to consider is not being able to build credit as a business. Building credit as a business is crucial to apply for a business loan in the future. Thus, relying too heavily on personal funds or personal loans could lead you down a spiral of being constantly dependent on personal financing for your business.

Structuring your investment

Personal funds can be classified as a loan or an equity investment. As a loan, you will need proper paperwork to document the transaction. The business will then owe you repayment and interest. As an equity investment, the business is required to pay you any applicable dividends or your share of ownership should it get acquired. In both cases, you would potentially receive personal income in the form of interest or dividends that you would need to report on your personal taxes.

Speak with an expert and track your funding

It is essential to seek out expertise and keep track of your funds. Accounting software can provide a convenient way to keep organized records. Meanwhile, an accountant and/or tax advisor can help structure your funds properly so that you don’t have an unpleasant surprise come tax season.

Be very careful about using personal savings

In times of financial uncertainty, it can be tempting to use your personal savings or credit to cover business expenses — and at the moment, that may seem like your best option. But combining your business and personal funds can backfire very quickly. Keeping your accounts separate can give you and your business the best chances of financial stability and overall success.



This post first appeared on Business Plan Software And Sales And Marketing Sof, please read the originial post: here

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How to Avoid Using Personal Funds to Address Your Business’s Financial Challenges in 2021

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