The Surprising Ways Personal Finances Influence a Small Business’s Outcome

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The Surprising Ways Personal Finances Influence a Small Business’s Outcome

Personal finance may seem like a topic of discussion you should keep separated from your professional life. Yet, surprisingly, it can impact your business’s outcomes in several ways. 

Whether it’s a credit score, your focus on saving or how you spend your money, your financial habits impact more than your personal life. In fact, it can be a determining factor in your business’s success or failure.

1. Creditworthiness

One of the most significant ways personal finances influence your business’s outcomes is through your credit score. For many small businesses, securing loans or lines of credit is essential to funding your business, maintaining cash flow and fulfilling expansion plans. 

However, lenders may pull records of your personal credit score before providing you with any business credit. This is especially true when your business is in its infancy stage and still needs to establish a good credit history. 

A credit score of at least 670 or higher can give you the means to access low-interest loans and better credit terms. This provides you with the financial stability needed to gain traction for your business.

Conversely, a low credit score may lead to rejections or loans with high-interest rates, placing an extra financial burden on you and your business. If you need to work on your score, consider making timely payments and regularly checking your credit. A proper credit score will ensure you increase your chances of securing business funding.

2. Personal Debt

High levels of personal debt can create substantial vulnerabilities for a small business. When you are obligated to overwhelming debt, this can quickly drain your personal savings and leave you with less capital to invest in your company.

Racked-up debt often correlates to poor credit scores, further limiting your business’s access to credit. For example, a small business owner with high debt may have to use a significant amount of their income to pay it off. In turn, they may leave their business underfunded during critical periods for growth. 

Start getting rid of debt by utilizing the “debt avalanche method.” This tactic involves focusing on paying off debt with the highest interest rate. Then, you will make minimum payments each month on that account. 

Once you pay that debt, you can focus on settling the next debt with the highest interest and so forth. However, you should take the payment budget you previously used, plus some extra cash, to put it toward the next account. Implementing this strategy can give you a confidence boost as you keep going because it is a quick method for debt repayment.

3. Financial Discipline

Your personal financial habits often predict how you will manage your business finances. That is why it is crucial to implement financial discipline in your personal life. These tactics include:

• Sticking to a budget
• Avoiding unnecessary debts
• Making payments on time

Establishing these habits lets you maintain a positive cash flow and manage your business expenses wisely. Additionally, it allows you to plan for future financial needs. All of these factors are crucial for running a successful business.

To ensure you incorporate good financial habits, consider developing a strict budget for your personal and business endeavors. Start by creating a realistic budget that includes all your income sources and expenses, and consciously stick to it.

Sustaining this practice will give your a clear picture of your financial health. Plus, it will instill habits that avoid impulsive spending and keep your finances under control 

4. Personal Savings and Investments

Personal savings and investments are crucial when owning a small business, especially if it is new. They can provide you with a source of capital to kickstart your company, fund expenses and improve cash flow. 

For instance, an entrepreneur may need to dip into their personal savings to cover startup costs — such as paying for a new email marketing platform to set up campaigns and reach new customers. Or, they might need to invest personal assets into their company for business expansion. 

Therefore, it is important for small business owners to practice good savings and investment habits. One way to achieve this is by making it a habit of setting aside a portion of your income regularly. Doing so will help you build a monetary cushion over time. 

Additionally, you could diversify your investments to have a varied portfolio. That way, you reduce risks in your business and provide yourself with various sources of capital.

5. Personal Financial Buffer

A personal financial buffer can be vital, as it acts as a safety net and provides financial stability for your small business. A financial cushion could be in the form of emergency savings or liquidable investments, making it easy to manage unforeseen business expenses or downturns. Plus, it keeps you from accruing additional debts or utilizing crucial aspects of your operations.

For example, a small business owner with a financial buffer can still operate during a period of slow sales. As such, they can keep business as usual without the slow period impacting their business or personal lifestyle. 

Ensure you are gaining a healthy financial buffer by using the 50/30/20 rule. This rule suggests that you allocate a portion of your take-home pay to different parts of your personal life. For instance, 50% of your paycheck should go to necessities, while 30% goes toward things you want. The last 20% of your pay ends up in your savings, which is the portion that contributes to your financial buffer. 

Implementing the 50/30/20 is one of the easiest ways to save money, allowing you to build a reserve over time. As you place more money into your savings after each paycheck, you will have a solid foundation for supporting your business during challenging financial times.

Use Personal Finances for Small Business Success

Several facets of how you manage your personal finances have a way of affecting your business’s growth, stability and overall success. From your creditworthiness and spending habits to your personal savings, these are the most important aspects to pay attention to when focusing on your financial endeavors. 

Take the time to assess your financial situation and look at ways to build it up to a healthy status. While the task of building and managing your personal finances may seem laborious, hard work pays off in the long run and will give your small business the boost it needs to grow.

The Surprising Ways Personal Finances Influence a Small Business’s Outcome
Brian Wallace

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