Why it’s important to focus on your personal finances when running a business
In the absence of pre-existing financial information from an established business, lenders will look at your personal credit history when making a lending judgement. It can take years for missed payments, CCJs and bankruptcy to be erased from your credit file. Most lenders won’t baulk at a late payment or two, but if you have CCJs or a pattern of missed payments, prospective lenders will view you as high risk.
Check your credit history
You should always check your credit record before you apply for business finance. Any mistakes, no matter how minor, could have catastrophic repercussions for your future business venture. Be sure to check your credit history at all three of the main credit reference agencies, and if you do spot any errors, request that your report is updated.
A poor credit rating won’t prevent you from securing business finance, but it does make it harder. A low credit score means a lender will assume you don’t have the necessary skillset to manage your business finances. Mainstream business lenders also charge lower rates of interest to entrepreneurs with poor credit histories and in the long-term, this will cost you money.
Luckily, there are alternatives ways to secure money to start a business, or working capital to grow an existing business. Crowdfunding websites such as Kickstarter, Crowdcube, and Seedrs are all well-established sites that focus on helping entrepreneurs find financial investors. However, you must have a solid business plan and impressive pitch to be successful.
Freelancers and Sole Traders
Freelancers and sole traders are in a tricky position when it comes to finances. If you run into debt on either your business or personal front, one will affect the other. It’s also tempting to mix up personal and business finances, for example making business payments from a personal bank account, or make payments into a SIPP from the business account. This, however, would be an oversight as it will make accounting inherently difficult and if you have to endure an Inland Revenue tax enquiry, you are leaving yourself wide open to claims of irregular payments.
Incorporating a Business
Incorporating businesses can protect your personal assets from business debt, but if you sign a contract in your name rather than the business, use a personal credit card to fund a business purchase, personally guarantee a business loan, or commit a crime, you lose immunity.
Sole traders can enter into an Individual Voluntary Arrangement (IVA), which places all debt, personal and business, into a management payment plan. An IVA will also protect your home and other assets. This type of arrangement is helpful for traders who want to continue trading.
Business failure in the UK is high. Statistics from the ONS show that only two in five small businesses will still be trading after five years, although there are some variances across different sectors. It’s not a sign of personal failure if a business venture doesn’t go according to plan. Indeed, most entrepreneurs take their experiences, bad and good, and use them to shape their next venture.
Nevertheless, it’s very important to have your personal finances in a good place, and perhaps more importantly, recognise there is a strong link between your personal and business finances.