So, you want to be a startup founder?
It’s going to take a great idea and a lot of hustle to get to where you want to be and you’re ready to put in the sweat equity. In fact, you’re ready to get started now building your business and brand.
Wait one second! Before you take off on your path to dominating your business sector, you’ll want to make sure you have your finances in order. For those who are just starting their business, the most crucial thing that they can do is separate their personal and business finances.
Separating finances is easy and necessary
When it comes down to it, setting up your business’ finances the right way, in the beginning, pays off. It doesn’t just allow you to more easily do your accounting, build your business credit, and save you headaches later on, but it also allows you to appear professional.
It also isn’t hard to do things the right way. All you’ll need to do is open a bank account and apply for a credit card – which can take as few as a few minutes in a branch or online. It will be the best minutes you spend working on your business and after that’s taken care of you can get back to total world domination!
Here are 3 reasons to keep your business and personal finances separate:
It helps with accounting…and everything else
Setting up a bank account and getting a credit card in your business’ name is key to ensuring that you stay on top of your business’ books. The last thing you want to do at the end of the month or the year is to go through your personal bank and credit card statements and have to figure out which expenses were personal ones and which were for your business.
Not only does that create added work, but it also makes it harder to quickly know how your business is doing. You might think that you’re bringing in more than you’re spending, but if you aren’t keeping a close eye on your expenses you might have missed a few.
When you’re starting a business cash flow is king. It’s important to know your burn rate as well or the amount that you are spending of your original investment and income every month. Having it all your expenses in one place makes it so much easier to have your finger on the pulse of your business so you can pivot if necessary.
Building your business credit
If you do all your business in your personal name, you don’t build business credit. While when you first sign up for a business credit card, you’ll likely have to personally co-sign but it will allow you to build a track record of borrowing and paying back money connected to your business.
You can also build business credit by asking for a line of trade credit from your suppliers like the company that you buy office supplies from. This will allow you to build up a great track record as a business.
Why is this so important if you have great credit yourself? Well, someday you might want to borrow more money than you could qualify for personally. Or maybe you’ll want to borrow money via a small business loan without having to co-sign it personally. If you build your business credit, both of these things are possible.
Another great reason to build your business credit is that, unlike your personal credit, anyone can access your business credit. That means that people who might want to invest in your business or just do business with you might pull your business credit in order to gauge how solid or trustworthy your business is. If you’ve been keeping all your accounts in your own name, you won’t have a good business credit score and you could lose out on business or investments.
It will save you headaches later on
There are a lot of problems that you might encounter if you don’t separate your personal finances from your business finances. For example, even if you start your company as a corporation or LLC, if you don’t separate your business’ finances from your personal finances, the argument could be made in court that you’re operating as the same entity. In that case, if someone were to sue your business they could also sue you. This essentially voids the reason why most people set their companies up to limit liability.
In addition, if you need to show your books to any potential investors or lenders, it won’t look professional that you’ve co-mingled your finances. Even if you have managed to build good business credit, they might not want to do business with someone who doesn’t know how to professionally run a business.
Nate Matherson is the CEO/Co-founder of LendEDU. LendEDU helps consumers learn about and compare financial products. LendEDU was originally founded in Cedar Rapids in 2014.