Small business owners often use their own money or personal finance to grow their operation. Business funding, however, can be a more attractive alternative – for many reasons.
When you launch your own small business, your business and personal lives can easily become intertwined, as well as your finances. If additional funds are needed, small business owners often take out personal finance rather than business finance, as it may seem easier to access. But this is not always the case, with new alternative lenders providing fast and easy business finance solutions.
The risks of putting personal finance into your business
Accessing personal finance to fund your business can be fraught with danger.
“The biggest risk of injecting personal finance into your business is that you’re not going to derive any income, and you’re not going to be able to pay yourself back,” says Melissa Bailey, head of operations at Kiwitax, which has been working with small businesses in New Zealand for over 13 years.
“If you’ve obtained personal debt to be able to inject the business with the funds, then if the business isn’t going to derive an income to be able to service that personal debt, then you’ll be personally liable for that debt.”
Keeping your business finances separate
Ideally, says Bailey, any debt a business takes on should be in the name of the business, rather than personal debt in the name of you as an individual.
“It’s always best to have the separate entity and keep the finances separate,” she says. “If you’ve got a company, trust or partnership, then it would be best to have that finance under the name of that entity. It’s always tidier to have separate entities with their own separate liabilities.”
As well as being tidier and easier to manage at tax time, a good history of repaying debt can add value to a business in the longer term, as you’re building a strong credit history.
“If you have had finance and you have kept up with the repayments, then the creditworthiness of your business will increase,” Bailey says.
Taking on good debt
The word debt usually has negative connotations. However, Bailey explains it’s important to understand the difference between good debt and bad debt.
“Business is all about generating income,” she says. “Often you need to purchase assets, and the aim is to generate or derive a greater income from those assets directly. Or you may need to purchase stock in order to generate revenue,” she says.
“People don’t often have a big chunk of funds sitting aside to buy assets, and it’s not always a good idea to use that money in the bank account to pay for an asset anyway, because an asset is not claimable in the year in which you purchase it due to asset depreciation rules.
“Finance is really good for enabling the business to get assets from which to derive income – that’s good debt, it’s income-producing. That’s a real plus about finance.
“It’s the ability to buy assets without affecting your liquidity.”
Taking out business finance can also be tax-efficient, says Bailey, in that interest can be claimed as a deduction for the business.
“Any finance is, of course, going to generate interest charges,” she says. “However, all of those interest charges are claimable in the entity.”
If you’re looking to expand your business, buy new equipment or simply manage your cash flow during a quiet period, find out how a Prospa Small Business Loan could help. Get in touch on 0800 005 797 to discuss your options or find out more.
The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.