Most new (newer) business owners will struggle in accessing money to grow their business.
In fact, nearly 90% of all small businesses in this country have self finance their operations in some way or another.
The problem is, as we are told, using personal assets or personal loans in your business is a no-no.
Every business guru on the planet will tell you to never mix your personal assets with your business – that you should always keep your personal income and expenses separate from your business.
The question though is why? Most will tell you that it is for personal liability protection as well as your tax liabilities.
Let’s say that you mix your personal assets with your business and your business gets sued. If a judge cannot make a distinction between you and your business – then that judge might just conclude that you are the business and vice versa – thus, even though your business is being sued, your personal assets could be at risk to the lawsuit – regardless of your form of business entity!
Or, in completing your taxes, if the IRS or state taxing authority cannot distinguish between your personal and business income and expenses, they may just conclude that they are one and the same and tax you twice on both – or not allow true business deductions.
Therefore, most everyone who thinks they understand business will tell you to keep your personal transaction (income and expense) separate from your business.
I am not one of those people. I understand that for many businesses, there are times that you have to use personal assets (part of your home, your car, your savings, etc) in your business. It just might be the only way you can run your business and satisfy your customers.
So, let’s look at three ways that you can use your own personal resources to finance your company.
1) Let’s say you need a small line of credit to purchase supplies that you will use to complete a job for a customer. Then, when the job is done, you get paid and pay down the line of credit. This is a very typical business situation.
However, you can’t get a bank to give you a business line of credit. In fact, you can’t even get one of the many credit card companies to give you a business credit card.
Yet, you still have to complete the job for your customer and need that small line of credit to do it.
This is a great instance where using a personal credit card or finding a credit union or community bank to give you a small (say $10,000) personal line of credit – to meet your short-term business needs.
The goal – and you will see this throughout – is to keep them separate. Thus, even though you used your personal credit and maybe even personal collateral to secure this personal credit line – you should only use it for your business needs.
Thus, all transactions that happen in this account can be specifically traced to your business only. Therefore, no one looking at this account will see where you took your kids to the local water park or bought groceries for a family cookout. Instead they will see very legitimate business expenses – only.
2) Let’s say you just personally came into some money and you want to use those funds to grow your small business. If you just start to spend that money for business transactions, you could begin to blur the lines here.
Instead, treat those funds as a loan to your business. This includes drawing up and signing loan documents (could be a single page agreement, notarized) as well as a real, relevant interest rate. Then, to show others that this transaction is an ongoing legal business matter make sure that you pay yourself (from your business) regular payment. No skipping them – even if it hurts your business. You have to treat your business just like a third party (say a bank) would and create a solid paper trail that keeps the line between your person and your business separate.
3) Lastly, taking money from friends and family. There may come a time when a spouse or parent will provide you money for your business. Again, put everything in writing and live by that contract. If you are getting money for personal needs as well as for your business – make two separate documents.
Further, for a business investment, ensure that the person giving you the money knows that it will be used only in your business. Just in case you have a falling out, they cannot come back on you later and try to take your personal assets to recoup their losses.
The goal here is simple. If you can’t separate your personal income and expenses from your business – then do all that you can to treat them separately.
Thus, should you ever find yourself in a situation (like those mentioned above), you should have no problem detailing what was actually used for your business.