When it comes to things to do before becoming an entrepreneur, getting your personal finances in order is not often a priority. Much of the focus tends to be on raising capital, finding business partners or suppliers, and getting the word out with trending marketing tactics to launch your business. However, the state of your finances can play an influential role in just how successful your business is. While there are ways to separate your business and personal finances, there remains an undoubted link between the two.
The Link Between Personal And Business Finance
Having healthy personal finances can help you maintain healthy business finances. Besides the common barriers that many small business owners face in obtaining credit due to their credit score, those that have gaps in their finances may find themselves forced to sign up for financing with higher risks (and interest rates). It can also limit the amount of investment you can put towards financing your business and its growth. At the same time, it is also important that you maintain a separation between your personal and business finances. This can work out much better for you when it comes to taxes, legal protection and even applying for a business credit card if your credit score is below par.
Work On Your Credit Score While Developing Your Business Plan
While your business and personal credit scores can be separate, lenders still consider your financial standing if you apply for a loan or credit card. In fact, a study by Babson College found that over 50 percent of discontinued businesses closed down due to a lack of financial funding. Because of this, having a good credit score is imperative if you are just starting out as an entrepreneur. A good approach is to begin working on improving your credit score while you are preparing to launch your business. If you are in a time crunch, focus on reducing your revolving credit balances such as your credit card balances. Paying down these balances can be reflected in your credit report within days and also reduces your credit utilization, a key aspect of building a good credit score.
Look Into Alternative Funding
If you do find that your personal finances are hindering your business finances and their potential to grow, there are alternative financing options you can consider. In the past few years, crowdfunding has become a popular alternative business finance option and helped millions of startups get off of the ground. The type of crowdfunding you opt to pursue will depend on how suitable its benefits are. For instance, equity-based crowdfunding allows interested parties to become part owners of your business and in turn, receive rewards for its performance.
Another alternative business funding option is to apply for a federal, state, or non-profit business grant. Many community authorities include entrepreneurial initiatives and grants to encourage small business owners in the local area. If you do find yourself or your business in need of urgent business funding, there are also several personal and installment loan lenders online that work with those with lower credit scores, or emergency financing needs.
Separate Your Business And Personal Finances With Separate Bank Accounts
This will make the tax filing process much easier when the tax year ends. Having separate bank accounts for your personal and business accounts also helps with clarity, on both the performance of your business and your personal financial position. Another thing you can do is to apply for a business credit card or incorporate your business as a limited company.
Last but certainly not least, having poor personal finances can end up bleeding into your business finances and performance as an entrepreneur- and vice versa. Being stressed about managing your finances can distract you from efficiently managing your business and keeping it financially secure. This can include regular oversight of key financial matters like missing the deadline for filing your business tax return. With this in mind, finding a healthy balance between maintaining good personal and business finances is critical for any entrepreneur whether they are just starting or are a seasoned business owner.
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