Benefits of Separating Your Business and Personal Finances

Daniel Penzing
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A Professional Reputation

One of the biggest benefits you’ll gain is the professionalism of your business.

Many small business owners and independent business people operate their business accounts from their personal accounts. This is very common and seems like the right thing to do but has some serious consequences for your business.

For instance, by using the same account for business and personal, you’re essentially treating the business as a hobby that’s on the side that’s separate from your life and your personal finances.

This will also impact your ability to acquire business loans in the future, which means you may have to front all the costs of your business with cash.

But if you separate your business expenses from personal expenses, it will show your lender that your business is a real business and that you are serious about its future growth.

It’s easy to keep business and personal finances separate while completing your business accounting. Just look for a personal checking account that gives small businesses a business line of credit. We recommend Bank5 Connect for business owners and independent contractors.

Protection From Self-Destruction

A wonderful characteristic of businesses is their ability to separate or divorce themselves from personal assets. Lots of people run a business on their own personal credit cards and then go bankrupt. This is bad business practice. If the business is properly separated and does not have any personal interest, you will not run the risk of personal liability.

Unfortunately, many people never learn this lesson, and they lose lots of money and assets that would have been otherwise protected. Separating your business form your personal decisions, decisions, and assets is important for your business, and it may even help your personal life.

Besides, creditors do not look for you, they look for your assets, what you own.

So, if you happen to have creditors looking for you, they will find you harder if you hide your assets in your business.

Shields you from your creditors.

Financial Diversification

Most knowledgeable investors know the value of diversification. If you don’t, it simply means that you’re spreading your money over a variety of investments to reduce your risk. For example, if one mutual fund of stock investments loses money in the stock market, you don’t lose all of your money on that one fund. If you spread your money over a variety of similar mutual funds, you’ll likely be exposed to less risk. Real estate, bonds, and other types of investments also have diversification benefits.

When it comes to your personal belongings, diversification can be just as important. Here’s what we mean. Imagine that you find a valuable '50s model car in your garage. It’s in good condition and could be worth a lot of money. However, the car is broken down and needs a part and a few other repairs. Meanwhile, you get a call from your best friend about her grandmother’s heirloom LP collection. The collection isn’t worth much, but one of the albums is in its original wrapper and has been signed by the band. The album is a collector’s item and could possibly be worth a decent amount of cash. One of these items can be the deal of a lifetime, and the other is worthless.

Ease of Proving Financial Stability

Let’s make a list of what you may be looking for in business financing:

The more serious you are about investing in your business, the more necessary it is to take care of taxes and other financial necessities.

Getting a business loan or investment is a perilous process. A business loan will require you to present a variety of financial documents that prove you are a viable and stable entity.

You will likely need a detailed business plan, a personal resume, previous tax returns, and a small business accounting book. If you are dealing with an angel investor or an equity-based investor, you will also need a business plan, a business model, and financial statements.

You may also deal with banks that want collateral from you. Banks want you to put up something that could become a target if you do not pay back your loan.

If you want to raise investment capital from angel investors or outside finance institutions, the best way to do it is with a good plan. A good business plan will help you get financing. It is the most important element of your business plan.

It allows investors to evaluate your business proposition. It explains to the readers (investors) what the business is about, why the business is a suitable investment at that time, how the business will create value or profit and how it will benefit the investors. Without a strong business plan, investors will not invest in your business.