I always tell business owners, especially new ones, that they absolutely must keep their business and personal transactions completely separate. So they’re frequently surprised when I go on to say that the state of their personal finances can have a big effect on their business.
Confused? Let me explain.
The main reason to keep your personal and business transactions separate is for income tax purposes. There are different rules for what’s deductible in computing your taxable income for your personal return and your business return. This is true even if you’re a sole proprietor filing a Schedule C with your 1040.
If you use the same checking account, debit card, or credit card to pay both personal and business expenses, it’s harder (and takes longer) to separate the personal and business expenses at year-end. The ideal solution is to use a separate business checking account and credit card.
The reality for many small business owners, especially new ones, is that it’s really hard to get credit in your business name. And if you do, the financial institutions often require you to personally guarantee the credit lines or credit cards that you get.
This means that lenders will pull a credit report on you and make decisions based on your personal credit score. Generally speaking, the higher your score, the higher credit limits and lower interest rates you’ll qualify for.
If you have poor credit or no credit, your business financing options will be severely limited.
If you have more than one personal credit card, one trick to simplify your record keeping is to choose one card to use solely for business purchases. that way you’re much less likely to confuse business and personal expenses or miss tax deductions altogether.
Regardless of the record keeping and tax considerations, if you’ve got a high interest card because of your personal situation, and you carry a balance from month to month, you’ll be paying that same high interest rate on your business purchases.
Improving your credit score will help you in your personal life as well as in business.
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