OPINION: For many small business owners, the line between business and personal can often become blurred. The uncertainty of the last 18 months hasn’t helped, as many scramble to juggle everything from the new traffic light system, staffing and balancing the books, to making time for family and friends, all in the lead up to the holiday season. Even more so if you’re in Auckland, where I am, as serious lockdown fatigue is likely to have set in weeks ago.
As restricted trading continues to add pressure on businesses, it’s also all too common for personal funds to be used to support or grow operations – whether it’s to invest in new technologies, expand premises or to manage cashflow. But personal finance is called personal for a reason. Using it for any other purpose may do more harm than good – to both your personal life and business.
According to RFi research commissioned by Prospa earlier this year, one in four Kiwi SMEs need access to more credit or lending than what’s currently available to them.
If you’re a small business owner considering how to finance your operations, here are four reasons why you might explore business funding options instead of dipping into your personal savings.
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Separating finances may save precious resources
Having a clear differentiation within your bank accounts, receipts and other documents can help you prepare for the next tax season.
If you aren’t strict with the way you access and spend money, it may waste a lot of your time (and increase fees if you’re using an accountant) to sort through everything. If you end up being audited by the IRD, that can add another layer of complexity to the process.
Using business finance also allows you to claim interest as a tax deduction. No matter what finance you pursue, there will likely be interest charges, so you might as well claim on them if you can!
Business funding may reduce unnecessary pressure on your personal life
Beyond the emotional stressors of running a business, having it intertwined with personal finances might put additional pressure on both the owner and loved ones, be it a spouse, children, or friends – especially during a time when it’s important to keep these support networks strong and stable.
When you inject your own capital, you inject your livelihood with it. With the ebbs and flows that come with a business, there may be times where there will be extra pressure on your personal credit card or hard-earned savings, resulting in added stress.
If you need capital and don’t have the savings, you might go one step further and consider approaching friends or family. While there may be “minimal interest rates” and “loose repayment terms”, the awkward nature of these engagements can often put a huge strain on those relationships.
Bigger risks equal more opportunities, but also potential consequences
The most common reasons for needing funds are for purchasing new equipment, working capital, or purchasing inventory which often require lump sum payments. Without an existing pool of capital, personal finance may only take you so far.
If you’re in a growth stage, you may decide to take advantage of “leverage” – a concept where you use debt as an opportunity to generate more capital.
Using personal finance as leverage may result in dire consequences – including assets like your family home or car being repossessed if you can’t repay on time.
Business finance also allows owners the ability to purchase assets for the business without affecting your liquidity, as if it’s income-producing, it becomes good debt.
While growth requires investment, and all investments come with a degree of risk, it shouldn’t come at the expense of your life savings or personal credit score.
Business finance options are growing, offering more choice, speed, and flexibility
The issue small business owners historically faced when exploring business funding, was deciding between personal finances or loans from traditional lenders.
The first requires you to give up your savings, adds stress to your personal commitments and requires you to generate profit as soon as possible to pay yourself back.
The other requires you to fill out stacks of paperwork at the bank, spend countless hours on the phone and jump through many hoops…often to be told you need asset security to be eligible for the loan.
Thankfully, these days there are other options. Alternative lenders are becoming an increasingly popular proposition, and are often more agile, fast, and understand the nature of small businesses better than the banks.
So, if you’re tempted to use personal funds or loans from family and friends for your business, don’t forget to explore your options – before you completely blur the boundaries between business and personal.
We want to see as many small businesses thrive and regain confidence as we head towards the end of another difficult year. A reminder to us all this Christmas, to support small business, so we can rebuild towards a more prosperous 2022, together.
Adrienne Begbie is the Managing Director of Prospa New Zealand.