Rule number one for managing money for a self-owned small business: keep your personal and business finances separate. Or so many entrepreneurs think. Yes, it is important to keep personal and business transactions as separate as oil and water for tax and regulatory purposes.
However, your personal financial status surprisingly matters for your business finances as well when you own the company you work at. There really seems to be little actual separation between the two, believe it or not. Now, let’s look at why this is the case.
Business Lenders Look at Your Personal Credit History
The foremost challenge in starting one’s own company is finding a source of capital. Most new entrepreneurs choose to take out a business loan. Obtaining a loan for a business is significantly similar to getting a loan for a personal matter.
Let’s start with the fact that lenders, whether it’s a bank or a professional moneylender, carefully scrutinize your personal finances before approving your loan request. That’s right; you cannot get a business loan simply by showing the lender a great product idea backed by market research. You will also have to prove your worth with your personal credit history.
No lender will give you a massive loan to start a company if your credit scores are low, or if you have no credit history to begin with. Therefore, before you apply for a business loan, take steps to improve your credit history. Start by reducing your overall debt.
For example, if you have a massive debt incurred by multiple student loans, consider student loan consolidation to pay off several loans at once with a single interest rate. Once you start making monthly payments, your credit score will improve. Your business loan will have a higher chance of approval if you apply with a good credit score.
Investors Consider Your Personal Money Management Skills
There is also another way your personal debt can hinder your ability to obtain funding for your startup. Some investors might interpret your debt as a result of faulty money management skills. Investors heavily scrutinize an entrepreneur’s ability to run a business and manage the capital provided. In essence, they want to make sure that you are not going to squander their money.
Also, they might be concerned that you would use investment funds to pay down personal loans. Therefore, it’s in the best interest of you and your business to get rid of personal debt as soon as possible. Prove to investors that you are a financially responsible person by making a long-term plan to be debt-free. Additionally, you can find professional job experience in a leadership role where you are responsible for someone else’s money.
Your Business Plan Affects Your Personal Life
Last but not least, your startup will be your life. The funds required for your business plan will partially come from your personal accounts, too. So, if your business tanks or soars, it will directly affect your wealth. As an entrepreneur, you will have to take steps to be financially savvy with regards to both your personal matters as well as work accounts. Keep them separate, but don’t let each negatively affect the other.
Ultimately, your personal and business finances are tied whether you like it or not. One of the challenges you face as an owner of a startup will be to effectively manage these two financial aspects of your life.