The past year has been rough on everyone. However, even during difficult times, people decided to start new businesses. Some were forced into the decision due to layoffs, while others enjoyed staying at home and wanted more control over their work/life balance.
According to NerdWallet, the average American household has $7,027 in credit card debt. Perhaps you also have a mortgage, car payment and student loans. Missing any of these bills negatively impacts your credit score.
Your personal finances impact your business in several ways. It’s important to be aware of the issues, so you can navigate them successfully and run a successful startup. Here are some problems you might face and how to circumvent them.
1. Higher Interest Rates on Loans
If you need to take out a loan to start your business or keep cash flow moving, banks only have your personal finances to go on for their decision. Your business isn’t yet established.
While you should keep personal and business finances separate, this is a case where your mistakes may impact your company. You may have to pay a higher interest rate on a loan or not qualify for one at all.
Do your best to make personal payments on time. This will show lenders you are reliable and stick to your commitments. It also raises your credit score.
2. Knowing Which Debt to Pay Off First
Make a list of your personal debt. Which loan charges the highest interest rate? If you pay off this one first, you’ll save more money over time. It is a smart strategy.
For example, if you inherit $20,000 and pay it toward your $25,000 auto loan, you’ll save $1,817.77 in fees and pay it off early. You can roll that payment into the next debt and clear it out ahead of time, too.
3. Difficulty Securing Suppliers
When you first start a business, you need supplies to get going. Either you need inventory to sell, or you have to secure parts to make products. Even a service company needs office supplies and such.
Suppliers will look at your personal finances to see if they can trust you to pay them on time. If you’ve defaulted on other loans, they may demand payment on delivery, which could result in a lack of cash flow for your business.
4. Maintaining Cash Flow
Speaking of cash flow, about one-third of small-business owners state a lack of funds is one of the biggest challenges they face. If you aren’t used to keeping track of your personal finances, you may have trouble getting in the habit with your new brand.
To keep cash moving through your business, you must know what’s going out and what’s coming in at all times. Find a system that works for you and stick to it.
5. Not Keeping Tax Documents
When you’re first starting out, taxes for the next year seem like a long way off. However, you can get into a lot of trouble if you don’t stay on top of the paperwork.
First, you may miss out on valuable deductions that reduce your tax liability. If you buy anything for your office, keep the receipt, file it in the appropriate folder and mark it into your accounting software.
You also must pay your taxes quarterly. Don’t wait until the end of the year or the next filing season because you may get hit with penalties and interest, expanding your tax burden beyond your ability to pay. The IRS will get its money one way or another.
6. Ignoring Your Own Spending Habits
What are your spending habits like, and how can you learn from them when marketing to your customers? Hopefully, you’re controlling impulse buying and only purchasing what you truly need. What types of marketing appeals speak to you?
For e-commerce sales especially, you must make an emotional connection with the consumer. What is their pain point, and why would they want to buy from you?
In the third quarter of 2020, e-commerce sales rose 36.7%. However, people were much choosier about where they spent that money. How can you get a piece of the pie and meet their needs at the same time?
7. Saving for a Rainy Day
Do you have a personal emergency fund to cover six months of living expenses? A rainy day fund is particularly helpful if you get laid off, can’t work for a short period or have another emergency.
Your business is no different. You should put some money aside when you have a lot of cash flowing in to offset the times when you don’t. If you had to shut your store down for two weeks due to a natural disaster, do you have the funds to recuperate?
Think about how much it truly costs to run your life and your business. Don’t forget expenses such as payroll, utilities, rent and items you receive from vendors. Know the true cost to do business every month and strive to maintain three to six months in your rainy-day fund.
Personal Finances Affect Business Funds
How you run your personal finances does trickle down into your business. If you fail to write entries for checks you issue from your checking account, you likely do the same with your business one.
Instead, seek to improve your overall financial health. The more detailed you can be, the easier you can pass some of the tasks off to professionals who know how to keep books or a chief financial officer. The money you’ll save in lack of errors, cash flow and taxes will more than pay their salary.