Curious how to build business credit without interfering with your personal credit? Follow these 5 steps to separate business vs. personal finances.
As a small business owner, it may seem like the line between your personal life and your business life is very blurry. You already know that finding ways to transition from work life to home life is important (not that that makes it easy!), but one other area you might not have put too much thought in is separating your credit. As it turns out, it’s very important to keep your business credit distinct from your personal credit, and it might even be easier to do so than you think. Here’s what you should know.
Why Separate Personal and Business Credit?
Keeping your business and personal expenses separate isn’t just about professionalism (although there is an element of that). There are three other big factors to keep in mind.
First, by separating your business credit from your personal credit, you’ll be better able to identify business expenses that you can deduct come tax time. This helps you decrease your overall taxable income and hopefully save some money.
It can also make it easier to gain access to essential business loans. Small business loans traditionally offer better terms and options for small businesses than do personal loans. By building up your business credit, you’ll be a better candidate for specific types of loans that can help get your business off the ground and stay afloat.
Finally, it keeps your personal credit safe. Separating your business from your personal credit means that your personal credit won’t be impacted by anything that might go awry with the business side of things.
How to Separate Personal and Business Credit
Using one credit card for both your business and personal purchases might seem easier, but it’s actually likely to cost you more time and energy in the long run, and it could even cost you a lot of money in missed business deduction opportunities. In order to start separating your business and personal credit, follow these simple steps.
You’ll want to speak to an accountant about which type of business entity is best for your particular line of work and business size, etc., but creating a separate entity under which you conduct all of your business work (including filing taxes) should be your first step.
2. Set Up Business Accounts
Once you’ve legally filed for your business, you can open bank and savings accounts under that name, and even apply for debit and credit cards for your business that might offer helpful perks and advantages that personal ones don't.
3. Don’t Buy Personal Items with Your Business Accounts
This might seem fairly obvious, but in the real world that means not using your corporate card to pay for personal items, and ensuring that you pay yourself an actual salary so that you can keep track of the money coming in that’s meant to go back into your business, and that which you can take to use in your personal, everyday life.
4. Keep Track of Everything
Whether you do this yourself with accounting software or hire someone to do it for you, it’s important to track every business purchase you make (which should be easy using your new business credit card) to make things easier for yourself when it comes to invoicing, paying bills and filing for taxes, etc.
5. Hire the Right People
Hiring the right group of people to help you keep track of your business expenses can save you time and money, too. This might include people like an accountant and a bookkeeper, or even a financial manager or controller.
Owning a small business is an incredibly exciting job, but it’s not without its stresses. One of the easiest things you can do to set your business up for success, financially, is to keep your business and personal credit separate using the tips from above. If you need a little extra help, a business coach or financial planner can help you determine what steps you can take based on your own specific needs.
The views expressed by the authors are not necessarily those of Fifth Third Bank, National Association and are solely the opinions of the authors. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, National Association. Member FDIC.