How your personal finances can greatly impact your startup
Eleanor Hecks
It’s good practice to keep your personal and business finances separate. However, even if you do a great job of separating the two, your personal finances can still have an impact on your ability to secure financing and run a successful business.
Your credit score, tax filings, and bank account can all affect your startup. In many cases, even small personal finance mistakes can seriously limit the options you have available.
This is how your personal finances may impact your startup — and how to make sure your business isn’t held back by your personal financial situation.
1. Lenders will look at your personal credit score and debt
Banks and other lenders are likely to look at your personal credit score to get a sense of how you’ve handled debt in the past. A lower personal credit score may make it harder to apply for loans and other financing for your business.
Even small mistakes — like a single missed payment on a credit card — can impact your score. A handful of small errors could be enough to limit what you can get when applying for a loan.
Having a large number of active credit cards, making “hard” credit pulls, and a high credit utilization rate can also negatively impact your credit score.
Avoiding these common credit pitfalls can help you keep your score in a good range and make it easier to get the financing your business requires. Paying on time and having a long credit history can also help you out here.
Many creditors are also taking into account other factors when determining how much you can borrow — like your business credit score. Your business credit score is like your personal score, but it’s tied to an employer identification number (EIN) rather than your Social Security number.
You build this score the same way you develop your personal score — by opening lines of credit and paying on time, every time.
2. Vendors and suppliers may also consider your credit
Many vendors and suppliers offer lines of credit to business clients.
Like lenders, they may look at a variety of metrics to determine what kind of credit they should extend. If you’re running a sole proprietorship or a smaller startup, there’s a good chance they’ll want to look at your personal credit score, as well as the debt you’re holding onto.
If your personal credit score is low or you’re carrying a significant amount of debt, it could make it harder to open a line of credit with suppliers. In turn, this could make it much harder to source critical materials and manage your business cash flow.
Fortunately, if you are able to get some vendor credit, it’s a great way to build up your business’s credit score. Regularly borrowing from and repaying your vendor will help establish your company’s credit record and, over time, bump up your score.
2. Identity theft can hurt your business
In the U.S. alone, there are more than 15 million cases of identity theft each year. Small business owners can also be more susceptible to having their identity stolen, due to the benefits that a business bank account can provide criminals.
If your identity is stolen, it can have a severe impact on your personal finances and your business.
Often, criminals will use stolen identities to open new credit accounts, which can negatively impact your credit score. If they steal your business’s identity, they may also file fraudulent tax returns, make purchases under your business’s name, or try to open bank accounts with your business information.
3. Tax mistakes can hurt your business
In some countries, if you fail to pay your taxes in full, the government can issue a tax lien or similar claim against your assets — and, in some cases, your business’s assets.
In the U.S.,for example, a tax lien against your business means the government claims your business’s assets — and could lead to a seizure of those assets to pay back taxes you owe.
Because tax liens are public documents, they can have a serious impact even if you quickly pay back owed taxes. Creditors and suppliers may be less willing to extend a line of credit if you’ve been served a tax lien in the past.
The best way to avoid a lien is by ensuring you don’t make mistakes when filing taxes. In many cases, it may be a good idea to hire an accountant who can help you manage your taxes and ensure you pay on time and in full, avoiding a potential lien against your startup.
4. Savings help you transition from opportunity to opportunity
Not every founder sticks with their startup forever. You may find that another opportunity comes your way, and you may need to pass on ownership of your business. Business legacy planning typically involves who will run your startup or business when you’re no longer able or no longer want to stay on.
Similar planning can help get your personal finances ready if you decide to try something new. A personal nest egg can keep you afloat while you transition from one project to another.
Make sure your personal finances don’t hold your startup back
Even if you keep your personal and business finances separate, problems with your personal financial situation can have a big impact on your business.
Poor credit, excessive debt, and tax mistakes can all make it much harder to get financing for your business. Keeping your credit score high, avoiding debt, and filing taxes on time can help ensure your personal finances don’t make it harder to run your startup.
Eleanor Hecks is editor-in-chief at Designerly Magazine. She was the creative director at a digital marketing agency before becoming a full-time freelance designer. Eleanor lives in Philly with her husband and pup, Bear.
