The state of your personal bank account can have a big impact on your business — even when you make the effort to keep your personal and business finances separate.
Your personal finances, including your bank account and credit score, can influence financing, taxes and grants.
Fortunately, for every impact personal finance can have on your business, there’s a way to reduce or eliminate the effects.
Your Personal Credit Score Can Affect Business Financing
Low scores could negatively impact the financing you qualify for — or, in some cases, discourage a lender from lending to you altogether.
A high credit utilization rate — which is the measure of how much outstanding credit you have compared to available credit — can also be a problem. Typically, lenders expect a credit utilization rate less than 30%. If you have $1,000 of credit available, that’s up to $300.
Some organizations will also account for your personal finances beyond your credit score when determining what financing you qualify for. If you apply for a Small Business Administration (SBA) loan, for example, you may be required to submit a personal financial statement that includes information like cash on hand, your liabilities or life insurance policy. The SBA uses this information to predict whether you’ll be able to pay back a loan that you take out.
If your personal finances are looking a little rough, they may deny you financing.
Even small financial mistakes can significantly impact your credit score.
Fortunately, it’s not too difficult to manage your credit and boost your score. In some cases, a low score may also be due to reporting errors in your credit report that can be resolved — fixing these mistakes and restoring your credit score can make it easier to qualify for financing.
Non-Separate Accounts Can Make It Hard to Keep Your Books in Order
Most financial advisers will recommend you keep your personal and business finances as separate as possible. There are a few good reasons for this — one of the most important being that separate accounts help you better manage your finances and navigate tax season.
Tracking business expenses can help you identify the tax deductions you qualify for. While personal expenses aren’t typically tax deductible, business costs often are — including expenses like lodging, travel, meals and office supplies.
Good accounting can also give you a better sense of your business’s financial health. If you pay for business and personal expenses using the same checking account, you won’t be able to know your business’s cash flow at a glance with your bank statement.
You may also need to keep your business and personal finances separate for legal reasons.
If you’ve incorporated your small business, it may be a distinct legal entity, depending on the form of incorporation you chose. Legally, this means you need separate personal and business accounts.
Even if you don’t legally need a separate account — a sole proprietorship, for example, is not a legally distinct entity — it’s still a good idea to keep your finances separate.
Strong Personal Finances Can Help Your Business
Even if your company is its own legal entity, your personal finances can have a real impact on your business. Financial and government organizations often consider personal financial info like credit score, assets and liabilities when determining if your business qualifies for a grant or loan.
Your personal finances, if they aren’t kept separate, can also make it harder to tell how much money your business is really making — and it may also cost you some valuable tax deductions.
Eleanor Hecks is editor-in-chief at Designerly Magazine. Eleanor was the creative director and occasional blog writer at a prominent digital marketing agency before becoming her own boss in 2018. She lives in Philadelphia with her husband and dog, Bear.
Interesting related article: “What is my Credit Score?“