If you’re launching a new business or already operating a small venture, you probably need access to capital. You may want to fund growth or handle unexpected business expenses like repairs or larger orders. While you can finance these using personal investments, is this the best approach? Can business financing replace personal investments in your business? Here’s what you need to know.
Can Business Financing Replace Personal Investments in My Business?
You can use personal funds for business financing. But it’s not the best approach. While the terms you see on personal loans may look appealing, there are several reasons you should avoid using these for your business expenses.
It Complicates Record-Keeping
When you use personal funds for business expenses, this makes your record-keeping challenging. You will have to manually enter transactions to avoid incorrectly-stated income, expenses, and equity balances.
It Can Impact Your Taxes
Taxes can become a problem as well. The IRS has rules on how you can write off business activities. When you use personal loans, you can only deduct the interest amount. Also, if you take money out of investments to use for your business, you could face tax penalties.
It Can Affect Your Personal Finances
Using personal funds for your business can jeopardize your personal financial security. You might “borrow” so much from yourself that you are unable to pay your own bills, or you damage your personal credit rating.
How to Separate Your Business and Personal Finances
The best strategy is to separate your business and personal finances. If you’re not sure where to begin, here are a few steps to get you started:
1. Apply for an EIN
Apply to the IRS for an Employee Identification Number (EIN) for your business. This is a unique identifying number you will use to file taxes and open bank accounts.
2. Open a Business Bank Account
Use your new EIN to open a business bank account and begin using it regularly.
3. Get a Business Credit Card
When you open your business bank account, sign up for a credit card as well. Use it for business purchases and pay off the balance every month to build up your business credit.
4. Pay Yourself a Paycheck
To create a separation between your personal and business finances, pay yourself a regular salary each month.
5. Maintain Accurate Budgets & Financial Records
As a business, you should take the time to maintain accurate annual budgets and financial records. Potential lenders may wish to review these.
6. Explore Your Business Financing Options
Once you’ve separated your personal and business finances, explore your options for short- and long-term financing.
Getting Business Financing is Easier Than You Think
Most small business owners believe their only options for business financing are traditional banks and credit unions. Those are excellent options for many businesses, but the options don’t stop there.
CAB Capital helps small businesses access working capital through a wide variety of alternative lending solutions. With more than 150 products from a group of 67 different lenders, we ensure you get the funds and terms you deserve. Contact us today for more information.