Are your personal and professional finances combined? If so, it could be a good idea to “decouple” right away.
For many small firms, having access to capital is essential. And the truth is that conventional lenders rarely make loans to businesses with a short history of trading. As a result, many businesses have turned to leveraging their own mortgage, personal loans, or credit cards to finance their operations in the hope that doing so is a practical and affordable option.
Many small firms have been forced to use personal credit sources to facilitate business funding because banks, which historically have been the primary source of finance, typically need the applicant’s home as security for the business loan.
Fast forward to the current environment: thanks to the rise of alternative lenders committed to fostering business expansion or easing cash flow issues, small businesses are now in the advantageous position of being able to access capital. This setting also offers a natural setting for “decoupling,” or the division of personal and business finances.
The truth is that you should keep your personal and professional finances separate if you own your own firm. Although interest rates have recently increased, they are still below historical levels, giving homeowners the opportunity to shop around for a competitive deal on their mortgage. Three advantages of separating personal and company funds are as follows:
1. Obtaining better home loan interest rates
Even while a mortgage’s interest rate may sound appealing when compared to the rates on some business loans, you also need to consider how long the loan will last.
The mortgage rate could be favourable, but if you take 15 or 20 years to pay off a business loan, the interest really adds up. To prevent the actual cost of the loan from skyrocketing, it is crucial to take into account both the loan period and the interest rate.
When you ‘decouple’ your assets, you can usually get more affordable rates because each asset can be valued separately and the best product for each may be identified.
It’s always a good idea to check your current finance rates to see if there are any lower ones available as interest rates fluctuate.
2. Your house is secure
Keeping your personal and work assets separate is the main incentive for decoupling your accounts. I usually tell small business owners to keep everything totally separate if at all possible when I work with them. It keeps your finances organised while also protecting your personal belongings. In the end, if your home is a part of your business’s finances, you are betting your house on the success of your enterprise.
3. It offers greater tax efficiency
When it comes to tax season, keeping your personal and business finances separate makes things much simpler. If your personal and corporate finances are linked, you must calculate percentages of what is and is not tax deductible. For instance, if all your financing is contained in a mortgage, it may be less tax-efficient because you’ll pay interest on the principal over a much longer period of time than if you took out separate financing for a vehicle, piece of equipment, or a business.
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Small firms should look at ways to separate their personal and business finances right away.
We can help you through the process and provide advice on the best products and structures for your business and personal finances, even though it can be a difficult undertaking to do.