Why you should keep your business and personal finances separate

When you’re starting out in business, the temptation to operate out of your personal bank account, or maybe bang some inventory on your personal credit card, is an easy one to fall for. In fact, we’ve all heard of businesses who funded those early days by credit card, or by the founder redrawing on their mortgage.

Long-term, however, there are big benefits to be gained by keeping your personal finances separate from your business finances. The rise of new sources of funding for small businesses are making it easier than ever to separate your finances.

Here are some of the benefits of keeping your business and personal finances separate:

1. It can be more tax efficient

Shanan McKeown, Director of Munro Benge Chartered Accountants, says from a tax perspective, mixing business and personal finances can get tricky.

“You generally don’t get tax deductions for personal expenditure; it’s only your business expenses,” he says.

“You could be adding unnecessary compliance costs if your accountant has to split up what’s tax deductible and what’s not, so it’s important to keep receipts and records.”

2. A better understanding of business performance

“The key thing for running your own business is to actually identify if the business is making a true profit,” says Richard Farquhar, owner of Farm Accountant.

“When you mix your personal items with the business it often gives you a false reading as to how the business is doing.”

McKeown adds, it is important to take time to manage your business, and regularly step back from the day-to-day to make sure you keep an eye on both profit and cash flow.

3. It’s an opportunity to set the business up properly

Farquhar says you need to protect your family home from creditors, and you can do that through your company structure, like using family trusts or companies to have separate ownership of your entities.

But you really need advice to set it up properly, he says. “Talk to a lawyer, accountant or financial advisor about how you can structure and protect equity. That advice could save you thousands at the end of the day.”

McKeown agrees. “Get the structure right before you go into business,” he says.

“When starting out in business, don’t skimp on your homework. This is a significant investment. You don’t want to throw your livelihood down the drain because you wanted to save a few dollars at the start. Look at the fundamental due diligence, financial, legal and the business itself.”

4. Build your credit score

Separating personal finance from business finance and using the latter to grow your business will also help in building your business’s credit score.

As JDI Business Coaching’s Gaylene Hughes points out, this can help when negotiating with creditors or when you’re seeking further capital to grow.

“In the event that you’re buying an asset, a good credit history might mean you can borrow at lower interest rates when the need arises,” says Hughes.

Get advice

With new specialist alternative lenders making it easier for small businesses to access finance, now is a great time to explore how to decouple your personal and business finances.

We are able to guide you through the process, and advise on the most suitable products and structure for your business and personal finance.

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisers. Although every effort has been made to verify the accuracy of the information, we disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.

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