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One of the most important pieces of advice I give entrepreneurs is “separate your business finances from your personal finances sooner rather than later.”
Many businesses begin not with a big business plan, but with a passion. You love baking cupcakes, for example, and you make them for family and friends. They rave about the cakes and suggest you start selling them; you sell them for your kids’ school fundraiser, people rave about them, you sell more — maybe in a local coffee shop. The next thing you know you’re baking hundreds, and you’re in business.
But all the money you’ve made from selling cupcakes is probably landing in your personal checking account. And all the sprinkles and cupcake pans you bought were probably charged on your personal credit card. This co-mingling of your business and personal funds will likely be problematic if you seek funding of any kind for your business.
Whether you seek a loan from a bank or an equity investment from an angel investor or help from those same family members or friends who raved about your cupcakes, your potential investors will likely want a clear picture of your business’s financial story.The paper trail
One of the easiest ways to tell your business’s financial story is through bank statements that reflect your company’s income and expenses. Early in your business’s life, it’s important to establish accounts that will only be used for business purposes. Consider:
- If you need additional capital to grow, lenders or investors may want to review your investments and rate of return or profit you have realized from your business. For example, say you want to refinance your short-term credit card debt with a lower-cost, long-term loan. A lender may require that a borrower document that the amount being refinanced was used exclusively for business purposes. That’s hard to do if you have been paying for business supplies on a personal credit card in the morning and buying movie tickets for the family at night.
- Not separately accounting for your business finances could have tax implications.
So do yourself a favor, keep your business and personal finances separate. (NOTE: This separation of finances was also a bit of advice business owners shared in our “Pay It Forward” survey.)
Have questions or suggestions about separating personal from business finances? I’d love to hear from you in the comments section below.Read More ›