Many business owners fail to realize how quickly personal finances can become wrapped up in a failing business venture – resulting in some pretty serious consequences. If you’re having a problem with your small business and you’re having financial issues, don’t draw from your personal funds to keep your business afloat. Attorney Xue Connelly discusses the importance of keeping your personal and business financials separate and gives tips on how to help get yourself out of a situation where you’ve utilized too much of your personal funds for business purposes.
Connelly says some reasons a business might begin to interfere with personal finances are because you’re having a problem making payroll, or you can’t make the loan payments on time. To try to keep their business afloat, some owners decide to:
- Dip into their savings
- Go into their 401K
- Take out a personal loan
- Take out an SPA loan and personally guarantee it
- Refinance home
“Small business issues go hand in hand with personal issues,” says Connelly. “Usually when balancing these two plates, if one comes down the other inevitably comes down with it. If this doesn’t work, you are digging yourself into a bigger hole in terms of your small business as well as your personal savings.”
It may be a better idea to file for personal bankruptcy to discharge debt personally so the business remains liable. This protects your family and home from creditors and makes it so only the business is liable rather than having your personal life completely linked to the business. Essentially this means that you are paying yourself back first, rather than your business, which really helps re-establish the separation between personal and business finances.
In cases where personal finances have become wrapped up in a failing small business, it’s important to speak to an attorney to determine the best option for your situation.