When business owners talk about struggles with cash flow, they aren’t necessarily only referring to the amounts of money they spend and take in. Another major aspect of cash flow is the need to keep a certain amount of money in more than one bank account. You’d think that succeeding in the first aspect would automatically do the same for the second. But plenty of businesses that make a lot of money aren’t as skilled at paying themselves whilst putting the right amounts into different accounts for different functions. This could interfere with your plans for a small business loan, especially if you intend to be approved by a bank. The bank’s decision will be largely (if not almost entirely) based on your recent bank activity.
Here’s a few tips for balancing bank accounts as you grow your small business:
1. Open Second Personal Bank Account
During their early days, countless small businesses make the mistake of mixing personal and business finances. They deposit personal funds and business revenue into a single bank account, which is therefore the same account they look to for spending, no matter the nature of the expense. Mixing personal and business finances makes it very difficult to get a clear picture of cash flow and profits, not to mention put money away.
“Why don’t they just open a business checking account?,” you might ask. Well, it turns out that some banks only let you open business checking accounts if you fulfill certain requirements. You might have to deposit a minimum amount into the account each month or maintain a minimum daily balance in order to avoid fees. Younger businesses might not be sure they can fulfill these requirements and don’t want to take on the stress of opening an account at a second bank. The solution is to simply open a second personal bank account. This will essentially act as your business checking account and allow you to separate your finances.
2. Know When It’s Okay To Use Personal Finances For Business Expenses
Mixing personal and business finances is not the same as using personal finances for business purposes. For example, many established businesses were personally financed by their owners at some point. Most banks favor business loan applicants who have “skin in the game,” as it’s called. They figure that someone who has invested his or her own money into a company’s survival is significantly less likely to let the business fail. But this does not mean young businesses should finance business expenses almost entirely with personal credit cards for long periods of time.
The only businesses that can (maybe) get away with doing this are businesses that have been open for several years. Such businesses might finance business expenses with personal credit cards for about a year to help fulfill a certain requirement for a bank loan. After all, most recipients of bank loans were approved because they didn’t really need the money. If you are rejected, financing business expenses with personal credit cards might show the bank that you weren’t exactly desperate for the loan.
But unless your business has been open for several years, you should only use personal finances for a few investments or to cover business expenses for a limited time. A younger businesses that uses personal finances to cover business expenses for long periods gives the impression that it lacks a solid foundation for revenue.
3. Use The Right System For Paying Yourself
It’s common for new business owners to go approximately three years without paying themselves a salary. This changes when their businesses are able to provide a full-time income. But not every business owner uses the same system to determine how to pay themselves. Owners of S-Corp businesses usually pay themselves as if they were an employee. Owners of LLC’s, on the other hand, pay themselves by taking a certain portion of their business’s revenue or profits. That portion is based on a number of factors, such as payroll and the amount of money that needs to be saved for taxes. If you choose to base your income on business profits, it’s generally advised to not exceed 50%.
This is why business owners are often advised to create a personal budget and a separate business budget. Keeping personal and business finances separate might mean figuring out how much money you need for personal expenses as well.
Adhering to these three tips might seem stressful at first but they will most certainly give you more peace of mind in the long run. You’ll have less work to do when pursuing small business loans and can therefore spend more time doing what you do best: growing your business and making money. Expanding will be very difficult if you don’t have a solid system set up for saving money, paying yourself, and keeping personal and business finances separate.