How personal finances impact your company’s growth
By ATB Financial 2 February 2024 4 min read
It’s a question all entrepreneurs ask as they attempt to get their business venture off the ground: how am I going to fund my business?
The life of an entrepreneur can be unpredictable and there’s often no telling what’s around the corner. Accumulating a strong financial foundation is vital in those first months as your company begins to take flight. Generating the necessary funds will more than likely require outside investment.
But how can you convince a potential investor their commitment toward a brand new business will eventually pay off?
What is your financial character?
A killer business idea isn’t always enough. You’ll likely need to demonstrate to an investor that you are capable of running a company and that your business plan makes sense.
Lenders will look at past practices so if there have been financial struggles, low credit scores, or a bankruptcy declaration, these factors all are considered when it comes time for a loan. A popular misconception held by new clients is that they can enter a bank and walk out easily with a business loan without any personal commitment.
The lender will go through your personal financial history. Do your credit cards have a high balance? Did you take out a second mortgage on your property? There are quite a few things that will be taken into account when you apply to the lender.
Past behaviour is the best predictor of future behaviour, so they’re going to look at how you’ve been managing your personal finances, as that will give some indication to the lender as to how you will manage your business.
Keep your credit score high
To strengthen your case for a business loan, an applicant should have an existing relationship with the financial institution and a manageable existing debt load. Having a good credit score will also be a plus for your application.
It’s easy to get into credit trouble. Some unscrupulous companies will issue lines of credit to nearly everyone. That might include people who have never had a credit card or line of credit, as well as those with bad credit. There’s a catch though: The cards or lines of credit come with sky-high interest rates that can often result in crippling monthly charges if balances aren’t paid off. If you have too many missed payments, your credit score can plummet quickly.
On the other hand, a good credit score strengthens your case and your financial character might more easily sway the lender into offering concessions, like a lower interest rate or better conditions on the loan. This is because the lender has clear evidence of your past ability to make good on an investment.
Separate your transactions
Another good financial practice includes a clear distinction between your business and personal life. Always keep your transactions separate.
Your business should have its own bank account and credit lines. It will make it easier to trace transactions in the future. Keeping separate accountings will make it easier to track your cash flow, knowing to the cent what’s coming in and flowing out.
Get help from a strategic professional
Navigating the financial terrain might prove bewildering for a small business owner whose background is something other than accounting, but it’s essential to take stock of your personal skill inventory.
For the entrepreneur unable to hire a full-time accountant or bookkeeper, easy-to-use software like Quickbooks can help to manage your day-to-day finances and turning to a financial professional for more complicated tasks like filing a tax return or strategizing growth.
Whether a computer program or a professional, outsourcing that work can free up more time to work on your business and can keep you organized and prepared for any future challenges.
Shift your business structure
Depending on structure, a business will be assessed at different tax rates. An incorporated company is subject to a lower rate of tax in Alberta. A sole proprietor, however, will have to pay at the personal income tax rate, possibly meaning a higher tax rate.
There are administrative costs for incorporating, such as hiring an accounting firm or a lawyer to draw up the paperwork but the tax savings offset these costs. In many cases, you won’t be risking the same personal liability if the business, as a separate legal entity, fails. If there ever comes a time to sell, an easier exit strategy is possible under an incorporated structure.
An incorporated business allows its owner to draw an income in various ways including issuance of dividends and offers investment incentives to a prospective investor.
If you’re able to pay yourself and reinvest money you’ve made right back into the business, it’s a good sign the company has room to grow. At that point, it might be time to consider incorporating.
Keep money on hand for taxes
Like debt, a hefty tax bill can cast a long shadow over your financial history. Glambeck suggests putting aside extra funds for future tax payments. You can also work out a pre-payment schedule with the government. This prevents the likelihood there will be an unpleasant surprise once the tax comes due.
Maintaining good financial practices in your personal life will help to ensure your company will be better set up for success when it’s time to grow. Developing good financial habits now will help position you as a strong partner to invest in when the right time comes.
If you’re looking for a deep dive into everything you need to know about growing your business, feel free to reach out to us to explore where you are with your business, where you want to be, and how to get there!