For some, especially single working owners or landlords, it comparatively seems easier to use an already existing account; their personal account. A survey of the North American banking market suggests that 56% of business owners use their personal bank account for their business as well.
Even though the numbers suggest that it is common to merge personal and business finances, small and medium-sized enterprise owners could face serious repercussions for doing so.
It seems considerably easy to adopt this practice as it can save you from the hassle of paperwork and identification process and going to the bank for this purpose, over and again. SME owners are also quite skeptical of investing their hard–earned money into new businesses, which is why they deem it easier to check the finances by keeping the two accounts merged, given the many benefits associated with a personal account.
One of the key benefits includes a lower or no business account fee. However, small business owners fail to foresee the countless benefits banks offer to business accounts, such as relationship discounts or additional services.
Experts suggest that keeping business and personal accounts separate is the key to the success of any business. By doing this, you will be able to improve your financial management, streamline your tax filing, and make it easier to withhold business outlays. When you keep your business and personal banking discrete, you’ll be in a better situation to manage your finances and file your taxes.
Here are some of the reasons why you should avoid mingling the two:
- The Image of Your Company: Maintaining the right and professional image of your company is crucial to developing a strong and recurring clientele and helps establish your clients’ trust. If you ask your clients to make payments to a personal account, the client might get skeptical and either not purchase your product/service, or even if they do purchase it once, they might not consider you for their next purchase. A separate business account gives your business a more professional and well-established reputation.
- Taxation: Mixed business and personal finances can lead to over-taxation or tax evasion. Both can be quite damaging to your financial standing and your reputation. It is crucial to keep the two separate and keep an accurate record of your personal and business–related spending. This helps ease the internal audit of your business finances and if, in the unfortunate event of any financial misgivings, your personal finances might come under strict scrutiny by the authorities.
- Efficient Record-Keeping: Efficient record-keeping is crucial for any business, and it is only possible if you keep your personal and business finances separate. It saves you a lot of time and allows you to maintain data in an organized way. Even though you might need an accountant to keep the record of your business, at the same time, it will save you a massive amount of cash and help you maintain a balanced cash flow.
- Leverage: The use of leverage is one of the most significant differences in business and personal finances. While many businesses run on leverage and have multiple credit lines activated, mingling with your personal finances can lead to serious problems and put your other assets at serious risks. Business leverage plays a vital role in increasing the profitability of a business but can be seriously impacted if the same credit line is used for personal purposes.
- Business Credit: Business credit is another reason to keep the two accounts separate. The ability to obtain working capital for your business is essential to developing it further, and business credit will be mandatory to secure more business loans. Suppose your personal and business income is merged. In that case, it will be difficult for you to provide your business income to banking agencies, consequently making it even more challenging to establish your business credit.
Given all the reasons listed here, it is quite important to keep business and personal accounts separate for better business operations and improved personal financial standing.