Building a startup is a meticulous endeavor that requires both business planning and financial planning. According to Investopedia, startup costs cover a variety of business needs — from research fees to equipment expenses. And since most startup owners finance their budding business with their own savings, this can put a considerable dent in their wallet. Though what many aspiring entrepreneurs fail to consider is that personal expenses can significantly affect their plans. So, here are three ways your spending can affect your startup, with tips on working around them.
Your Credit Score Can Affect Your Business Loan Applications
Your creditworthiness is the measure of your reliability in paying back debts and other dues. Thus, a low credit score can cause a loan service provider to reject your application. This is more so the case for new startups, because without any prior financial data tied to your business, lenders only have your credit score to consider for their final decision.
If you currently have a low credit score, it’s best to increase it before applying for business loans. Luckily, an article by Petal about credit scores shares that certain financial practices can improve your score. For instance, you can schedule reminders to alert you when you should pay your credit card bills. Keep your balances as low as possible because this makes your credit score grow over time. Additionally, hold off on opening new credit accounts unless it’s necessary for your business. Because each time you apply for a new credit card, your provider will perform a credit check, and too many of these checks can cause your credit score to decrease. Essentially, the higher your credit score, the easier it will be for you to acquire a business loan, so take care of it!
Tax Mistakes Can Lead to Financial Problems for Your Business
Personal taxes can also get into the way of your startup plans. Keep up-to-date with your tax obligations, because failing to do so could result in a lien against your assets. Liens are legal claims on your properties, allowing them to be used as collateral to repay your debts. These are issued by the IRS and can apply to your land, home, and even your business.
To avoid any tax mistakes in the future, you should either educate yourself on taxation laws or get help from a tax accountant. The Houston Chronicle explains that these professional accountants can assist with tax return preparation and tax planning, while ensuring that their client minimizes income tax. Tax accountants extend their services to both individuals and business entities, so you can hire one to help with both personal and business taxes.
Your Current Financial Situation Can Affect Potential Partnerships
Depending on your industry and niche, you may need to connect with third-party organizations, such as vendors or suppliers, to assist with internal operations. In many cases, the external organization will examine your financial standing before deciding to partner with you. They can, for instance, check on your credit score or your personal debts. If they don’t find your financial history satisfactory, they may opt not to push through with the partnership.
The best way to remedy this is to remain on top of your personal finances. Of course, this is easier said than done, but with a few digital tools and some perseverance, you can keep an accurate record of your expenses. Our feature on ‘3 Reasons Why Dealing with Startups Might Be Preferable’ also recommends partnering with other startups. Local startups tend to offer quality services for less, compared to big corporations. They may also provide unique features that could give your own business a competitive edge. So, it’s always worth scouting through other startups in your area or industry.
It’s clear that personal finances play a central role in your startup’s growth, so consider that when starting your journey as an entrepreneur. However, this is not an excuse to mix personal needs and startup obligations. The US Small Business Administration emphasizes that business owners should draw a clear line between their personal and business finances. This is so that entrepreneurs can easily manage their assets and create a clear budget for their business endeavors.