As a small business owner, you may have already heard of making S.M.A.R.T. goals. These are goals that are sustainable, measurable, attainable, realistic, and timely. Creating these types of goals for your financial future will help you maximize profitability in your business and create comfortable savings in your personal finances. As a small business owner, you need to actively monitor your professional and personal budgets closely, as they are heavily intertwined. Here are some tips to help you create smart financial goals for both you and your business.
1. Organize your accounts
Being organized in general is vital to having your business finances and personal finances streamlined. You want to have these finances as separate as possible to ensure you are monitoring each of your finances appropriately. You may find that one financial institution is better for your business banking than your personal banking and vice versa. Things you may consider when choosing a place to have your accounts are:
- High yield savings and checking accounts
- Business loan financing
- Online banking services to automate bill payments and transfers when necessary
- Fees and restrictions on accounts (like the number of cardholders allowed if you have multiple people that can make purchases for the business, etc.)
Choosing the best financial institution for you and your business will be determined by what your needs are and how you want them met. It is also in your best interest to invest in tools and technology to help you maintain your budgets, both personally and professionally. Having a good bookkeeping software will help you immensely when it comes time for tax season.
2. Understand your credit
Being a small business owner means lenders see your credit through two lenses. While business credit is different than personal credit, depending on your business, they could intertwine more than you think. If you are a sole proprietorship, your business credit is heavily linked to your personal credit because you are most likely not using an employer identification number. Instead, you are using your social security number to apply for loans for the business. In short, many lenders will look at your personal credit to determine approval for any business loan. When they base your business lending on your personal credit, that can also have an impact when you decide to apply for loans for your personal life outside of the business. When this occurs, it is important to manage your debts strategically. Having a plan to tackle your debts will allow you to maximize the positive impact on your credit.
Debt isn’t always a bad thing; having a healthy mix of debts will help boost your credit score when properly handled. Having different types of loans, like revolving credit (ex. a line of credit or a business credit card), will impact your score differently than if you only have closed-end loans (ex. personal loans or vehicle loans). It is important to make your minimum monthly payments for all the loans you have, but you should keep close attention to your high interest-bearing loans. If you have some loans with higher interest rates than others, making payments greater than the minimum payment required will bring those balances down faster and prevent you from paying the large amounts of interest the lender wants you to.
3. Time your lending needs
When you are a small business owner and your business and personal credit are linked very closely, it is important to make wise choices when taking on debts for either facet of your life. Aligning your personal goals and your business goals will help you decide when is the right time to take on loans of any kind.
When applying for loans, your credit is hit with a hard inquiry to get your true score. When this happens, your credit score drops a few points and it takes some time to bounce back. While this isn’t always a big issue, if you find yourself shopping around for loans at different lenders, all pulling hard inquiries on your credit, it could really negatively affect your score and thus put you in the position of only being approved for high-interest loans. Some tips for loan shopping to save you from this are:
- Do some research on your own first. You can keep up with your credit score by using free apps like Credit Karma, but it is important to note the score they show you is not a truly accurate score and you should give yourself some wiggle room with the number they have. If you notice a significant drop and are concerned something is wrong, you can request a copy of your credit report from one of the major credit bureaus. Your credit report will show you your lending history, which includes any accounts you have open with creditors and your payment history with each of them.
- Decide what you are looking for from a lender. Things to consider are the best overall rates, perks like cash bonuses when having loans with said lender, no prepayment penalties, and a prior relationship with the lender and the level of trust you have built with them.
- Loan preapproval is key. While knowing what you are looking for in a loan and a lender is important, also having a preapproval for whatever loans you need will help you stay within budget while you are shopping. You can use the preapproval period, which is generally 30 days, to apply for other loans with the same lender as well. For example, you may be looking to buy a new van for your business. While in that preapproval window, you realize your family needs to upsize to a new home. You can get preapproval for a mortgage during this time with the same credit report pulled while you were looking for a van without impacting your score with a new hard hit. Since your business and personal credit are so closely connected, taking advantage of those preapproval windows may be key for maximizing your opportunities.
Aligning your personal and professional goals will help keep your budgets in order and allow you to strategically plan your future endeavors.
4. Plan for your future
Making investments personally and professionally is important to create a strong foundation for your future. There are many ways you can invest, but it’s entirely up to your comfort. Here are a few options:
- Open an Individual Retirement Account (IRA). You may focus your savings on funding an IRA, which can come in a few different forms for small business owners.
- Open a Certificate of Deposit (CD). CDs are a low-risk savings option in which you set aside a certain amount of money in the account for a longer and specified amount of time at a high interest rate. These accounts have a much higher interest rate than normal savings accounts.
- Enter the stock market. Investing in the stock market both personally and professionally can allow you to diversify your investments.
- Use your tax refund to boost your credit score.
With each of these opportunities, you may seek out outside assistance like a financial advisor to help you determine the best course of action for you and your business. Hiring the services of someone to manage your portfolio can alleviate the stress of running your business and personal finances all at the same time.
There is no one way to manage a perfect balance between your personal and professional finances as a small business owner. Taking the time to assess the goals you want to achieve, not just in the calendar year, but well into the future, will allow you to pinpoint the areas of growth you would like to focus on. Your future is in your hands.
Also published on Medium.