When starting or growing a small business there are a number of things to consider, not the least of which is managing your business’s finances in addition to your own. The world of business finance is vastly larger than that of personal finance and can be a bit overwhelming at first. Getting a loan, paying your taxes, and taking out insurance are all different when it comes to your small business as you’ll learn from these helpful tips.
The biggest key to managing your business finances is ensuring that you have the proper working capital. Trying to cut corners and get by without proper funding could stifle your business’s growth and could even cause it to fail. While no one likes taking on debt, the capital that a small business loan could inject into your company could not only save your business but help it thrive.
Ever since the banking crisis of 2008 large banks have cut back significantly on the number of small business loans they approve. While they have made strides over the years they are still far less likely to lend than other sources. According to Biz2Credit in March 2016 only 23% of small business loans applications submitted to big banks were approved. Meanwhile 48.7% of applications were approved by smaller banks although that figure has been trending downward over the past 12 months.
Luckily today there are more lending options for entrepreneurs than ever before. Several alternative lenders have set up shop on the Internet in order to assist small businesses with getting the capital they so desperately need. In fact, in March 2016, alternative lenders were found to approve 60.7% of small business loan applications submitted.
There are many facets to the “alternative lending” field but one of the largest is known as peer to peer (P2P). Just before the crisis of 2008 hit, companies like Prosper and Lending Club launched marketplaces that sought to link up borrowers with investors willing to fund their loans. Lending Club in particular has seen incredible expansion, reaching over $16 billion in loans facilitated and being listed on the New York Stock Exchange (ticker symbol ‘LC’). Currently Prosper allows entrepreneurs to borrow up to $35,000 for their businesses while Lending Club offers up to $300,000.
One big difference between managing your personal finances and managing your business’s is that companies must pay taxes quarterly instead of on the traditional April 15th deadline each year. Businesses are also required to pay estimated taxes and could be penalized if their estimates cause them to underpay. So how can you determine what you’ll need to pay?
According to the IRS, entrepreneurs are required to pay quarterly taxes if they expect to owe more than $1,000 in taxes for the year. Additionally, if your estimated taxes come up more than $1,000 short for the year, you will receive what called an “underpayment penalty.” The good news is that, if this is your first year with an underpayment penalty, it can be waived.
Obviously it can be difficult to know what you’ll owe during your first year in business (which is why the IRS allows you one waived penalty). After that year, a good rule of thumb is to pay 110% of whatever you owed the previous year. However keep in mind that if your business grows significantly in that time you will need to reassess your tax estimates in order to avoid future penalties.
Taking Out Insurance Policies
An unfortunate side effect of starting a business is that it opens you up to all kinds of liabilities. Because of this there are many types of insurance you may need to keep your company and yourself financially safe. The insurance(s) you’ll need may depend on the type of business you have and could change overtime as your business grows.
The most common insurance that nearly all entrepreneurs will need is liability insurance. These policies vary but can include everything from customers getting injured on your property to libel if you’re a freelance writer. Several insurance agencies offer some form of this insurance and can help you figure out what policy is best for you.
Of course, if your business purchases any type of vehicle — be it company cars, promotional vehicles, or even a food truck — those will all need to be properly insured. If you have employees, you will also need to worry about things such as worker’s compensation and covering employee health insurance. Thanks to today’s digital world, there is even data breach insurance available. While some insurance may not be necessary for your business, be sure to seriously contemplate each type of coverage and determine if it’s worth investing in a policy.
While fundamentally similar, personal finances and business finances have some major differences that new entrepreneurs should be aware of. Even more experienced business owners should pay close attention to their finances and make adjustments as necessary. Along with some hard work and a little luck, properly managing your business’ s finances will help ensure your personal finance prosperity as well.