In a perfect world, businesses would run risk-free with most of them thriving for years while providing jobs to multiple generations. However, today’s imperfect world has a third of small businesses surviving past their tenth anniversary, and 20% failing during their first year, according to USA Today. Since where your business will fall on this risk spectrum is not in black and white, the proactive approach for countering risk is to be ready for any surprises.
In case your business fails while its accounts are linked with your personal finances, then you will take a huge blow. Separating your business and personal financial accounts is, therefore, a great option to help your business survive while protecting yourself from this risk. In addition to this, it offers multiple benefits for the growth of your business.
Here are four perks that this separation has in store for you:
Build Your Business’s Credit Score
Your credit rating plays a pivotal role in ensuring the stability of your business, especially when you need a financial boost, according to NeedCashNow.org. A business with a favorable credit score will have a higher chance of securing high financing at a low rate. In case your business is blended with your personal accounts, it might be difficult for lenders to assess the income of your business to determine its creditworthiness.
Generally, your credit score might have to be assessed when signing any loan agreement. While a good credit score will increase your chances of landing favorable loans, having an unfavorable score can be a deal breaker. Unlike a case where you have different business and personal financial accounts, you will have to be responsible for the debt incurred by your business.
The ability to enjoy tax deductions, including writing off your business’ expenses, should be good enough for you to split your business and personal finances, as noted in an article on The Balance. You will need to keep an accurate record of both accounts. This will reduce your stress levels as well as help you save time when it comes to filing taxes. Having separate accounts can also prove to be worth it when it comes to tax audits. In case your finances are merged, both your business and personal finances will have to be audited.
Build A Professional Image
Unless your business is more of a hobby than a serious venture, you ought to work out ways to make it look professional, and using separate accounts is a step in the right direction. A stand-alone business account will make you look serious both in the face of investors and that of customers. Additionally, applying for separate credit cards for both accounts will help draw the line between personal and business expenditure.
In situations where people have to write checks for services offered by your business, using your name on the accounts will tend to appear as an amateur move. In a nutshell, a business account will increase the credibility of your business while showing stakeholders that you are in your line of business for the long haul.
Save Time and Money
Blended accounts will typically have expenditure and earnings intertwined. When creating financial statements, a lot of time will go into separating the financial information from both areas. Additionally, some of the cash needed for business expenditure might fall into the cracks since you might use it for personal needs.
In case you hire an accountant, then having separate accounts will mean fewer hours will be spent retrieving vital information, not to mention the reduced cost of working with such a professional. For businesses that use accounting software, they can get to form a clear path for recording financial details within a short time, according to a PCMag article.
Venturing into the business world as an investor will need you to accept the risks and returns that your business promises in equal measure. The trick is to protect yourself and the business from the controllable risks. Consider using different financial accounts to embrace the above benefits while avoiding any personal liabilities.