Did you know that over 20% of small businesses in the U.K. don’t make it past the first year? One of the biggest contributors to this is using the same account for their business and personal finances.
When you’re just starting as an entrepreneur, it can be tough to figure out the best way to manage your finances. Do you keep everything separate? Do you combine your personal and business money?
While there’s no one right answer, most small business owners find it best to open a bank account specifically for their business. This is one of the most essential business banking tips to consider.
Here are seven reasons why you should consider doing the same:
1. Makes Tax Preparation Easier HMRC
Separating your business and personal accounting makes tax preparation easier because it helps you differentiate what is and isn’t taxable income. This can save you a lot of time and money when it comes time to file your taxes.
It also helps you automate your tax preparation process. With separate finances, it’s easier for your accountant to link all business-related transactions on your account to your tax preparation software.
With a separate account, you don’t have to spend countless hours sorting through different expenses, trying to figure out which are personal and business-related. This makes it easier to determine deductions come tax season.
And a bonus benefit is that it minimizes your risk of being audited. The HMRC is more likely to audit business owners who mix their personal and business finances.
2. Automates Your Bookkeeping
Keeping track of your business finances can be a daunting task. But when everything is in one place, and all transactions are automatically recorded, it makes the process of bookkeeping much simpler.
Bookkeeping automation also means you have a more accurate record of your business finances. This information can help you make informed business decisions to improve your financial health.
3. It’s Easier to Get Business Loans
When you have a business bank account, lenders know that you’re serious about your business. It also shows that you’re taking the necessary steps to protect your finances. This makes it easier to get a business loan to expand or grow your business.
Having a business bank account also shows that you’re able to handle money responsibly. This is an important trait for any business owner looking for additional financing. The last thing a lender wants is to risk their money on a business that may not be able to repay the loan.
4. Helps You Manage Your Expenses
When you have a business account, all your business transactions will be organized in one place. This makes it simpler to keep track of your spending. It can also help you stay on budget and make informed business decisions.
When you have a business bank account, you’re also able to receive payments from customers. This makes it easy for them to pay and reduces the chances of them forgetting. It’s also a great way to build customer loyalty.
When you’re looking for a business bank account, it’s important to find one that fits your needs. Make sure to compare interest rates, fees and other features. Don’t forget to ask about the bank’s lending capabilities.
5. Protect Yourself from Business Debt Liability
When running a company, it’s important to protect yourself from business debt liability. By opening a business bank account, you can help ensure that your personal finances are not liable for any business debts.
Business debt liability is the legal responsibility of a business owner for the debts of their company. This can include personal credit cards, lines of credit, and loans taken out in the name of the business.
If the business goes bankrupt or defaults on its payments, the creditors can go after the business owner’s personal assets to cover the debt.
A business bank account helps to protect your personal assets by keeping your business and personal finances separate. This way, if the business goes bankrupt, the creditors can only go after the assets of the company, not your personal belongings.
6. Show the HMRC That Your Business Is Not a Hobby
A business bank account provides a clear separation between your personal and business finances, making it easier to track your business expenses and income. When you file your taxes, having a business bank account can help prove that your company is a legitimate business and not just a hobby.
If you are self-employed, it’s important to have a business bank account to track your business income and expenses. A business bank account can also help you save money on taxes.
By deducting your business expenses from your business income, you can lower your taxable income.
7. Helps You Establish Business Credibility
When you’re starting a small business, it’s important to establish credibility with your customers and vendors. One way to do that is by having a business bank account. A commercial bank will take you more seriously when you’re doing transactions and may be more likely to give you a loan if you need one.
Having a business banking relationship also shows that you’re a professional and are serious about your business. Additionally, a business bank account helps you look more professional.
It looks much more professional to have all of your transactions taking place through a dedicated business bank account instead of mixing your personal and professional finances together.
Follow the Above Banking Tips
When launching your first business, it can be tempting to mix your personal and business finances. After all, starting a business is a lot of work and opening a business account isn’t a priority for many.
Unfortunately, this mistake could cost you dearly down the road. By opening a business bank account, you can protect yourself from business debt liability, show the HMRC that your business is legitimate, and establish credibility with your customers and vendors.
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