July 30, 2018

4 Ways That Your Personal Finances Can Affect Your Small Business

Credit scores, debt, tax issues, and other personal financial matters can hurt your business, so it’s important that you’re aware of them. In this post, we’re going to review how your personal finances can affect your small business.

1. Lenders Will Consider Your Personal Credit Score

Many small business owners rely on loans and other sources of funding to start and maintain their operations. Cash flow issues, liquidity problems, or outstanding invoices might have you in a financial pinch, but a loan could help you survive tight times. When you apply for a loan, the lender will review your credit score, and if your score is low, it could prevent them from providing you with financing. Small mistakes can have a dramatic impact on your credit score. Perhaps you forgot to pay a credit card bill for several months. Even if it’s a small payment that you’ve missed, say $20 dollars, it’s going to impact your credit score.

Other Factors That Could Impact Your Credit Score:

  • Having numerous active credit cards.
  • Making payments late.
  • Having too many hard credit checks.
  • Having a credit utilization rate.
Your credit utilization rate is one of the most important factors for determining your credit score. Your credit utilization rate refers to the amount of credit you have outstanding compared to the amount available. Most lenders want to see your credit utilization rate below 30 percent. Ultimately, you might believe that your personal credit score will only affect your individual finances, but this isn’t the case. It could also hurt your business, especially when it comes time to apply for a loan.

2. Personal Debt Can Impact Your Credit Score

As lenders examine your credit score, they’re also going to consider your personal debts. For one, personal debt is a component of your credit score, and high debt-to-income levels can negatively impact your score. However, if you’re making your payments on-time, you can still secure a good credit score even if you have considerable debt. Second, by examining your personal debt, lenders will be able to better determine your ability to make payments. If you’re over-leveraged and already have numerous payments to make, you’ll struggle to afford additional payments. Thus, even if you have a high credit score, if you have a lot of debt, lenders may not feel comfortable providing you with a loan.

How to Keep Your Debt in Control:

  • Have a good grasp of your income, so that you can better understand how much you can spend and borrow.
  • Look for ways to cut costs so that you can put this money towards reducing debt.
  • Invest rather than spend. For example, purchase a house, instead of renting.
Remember, your spending and financial choices will impact your credit score, which in turn affects your business. Likewise, your credit score can impact your debt levels through higher interest rates and other factors.

3. Your Financial Situation Could Impact Suppliers

As you likely know, suppliers will often extend credit to the businesses they work with. For example, if you run a grocery store, your suppliers may provide you with two months’ worth of credit for the goods you purchase from them. That way, you can sell the goods first and use the profits to pay your invoice. Some suppliers will examine your credit score and personal debt levels to determine how much credit to extend you. If you have high personal debt or a low credit score, they may be unwilling to extend credit or may ask that you pay your invoice sooner.

4. Tax Mistakes Can Create Numerous Headaches

Finally, taxes are a serious burden for small businesses and individuals alike. Not only can taxes be quite expensive, but they can be difficult to compile as well. Tax mistakes can create numerous challenges, such as:
  • The IRS could file tax liens against your properties, including your business.
  • You’ll accrue interest on any outstanding debts.
  • In a worst-case scenario, tax issues could force you into bankruptcy.
As such, it’s important to minimize mistakes and have a full understanding of how much you’ll owe each financial quarter. If you’re having trouble filing your taxes, consider using a professional accountant, who can ensure that your personal and business taxes are both filed correctly.

Conclusion: Your Personal Finances Will Have a Big Impact on Your Business

As you can see, there are many ways in which your personal finances can impact your business. Although there are certain steps you can take to separate them, it’s important to consider how your personal finances will affect your business. Don’t be surprised if lenders and suppliers closely examine your personal financial situation, and judge your business based on what they find. Moving forward, try to be increasingly aware of your personal finances, so that it doesn’t negatively affect your business.