Before starting a business, you need to know the source of your starting capital. Most startup owners use their personal savings as the primary way to get their business off the ground. The latest statistics indicate that only 34 percent of startups in the United States were financed through bank loans in 2018.
There are many benefits of financing your business through personal savings. For instance, you won’t have to worry about working with banks or paying high-interest rates on a loan. All you have to do is wire money from your savings account or withdraw cash from your account.
But before you put your hard-earned money into a new business, there are several important things to consider. This article gives you seven steps to follow when putting personal money into a business.
Separate Your Personal And Business Bank Accounts.
It is unwise to put your personal and business funds in one account because you won’t be able to monitor how the business is doing. It also puts your personal money at the risk of tax problems. By separating the two accounts, you can always know the company’s financial standing, and it provides safety for your personal finances.
For instance, you can create a legal entity such as a limited liability company (LLC) to protect your personal assets from business liabilities. With a business checking account, you can carry out your business operations with peace of mind knowing that your personal assets are safe. This account makes it easy for you to make payments, receive deposits, and send invoices. That way, you can monitor how your business is doing and whether you are making profits or experiencing losses.
Determine The Source Of Your Funds.
You don’t need to fund your business with your personal savings account. There are many other ways of personally funding your business, including:
- Using your credit card
- Utilizing your home equity loan
- Cash from friends and family
You have to decide which one of these funding methods is the best for your startup. Before you make your final decision, understand the complexities and potential risks of each of these processes. That way, you will be able to determine the most viable option for your business.
Record The Transaction For Accounting Purposes.
Since the whole idea of investing your own money in the business is to make a profit, you need to properly record the transaction so you know when you can pay yourself back. It is important to record the transactions between your personal and business bank accounts so that you have a clear record of the differences, in case of any legal issues down the road.
When transferring your money to a business account you must properly identify it as being either a loan or business equity. This will be a crucial piece of information when your business is ready to pay back the money you invested. If you’ve indicated it as business equity, the business won’t be obligated to pay you back. On the other hand, if you want the company to pay you back, be sure to identify the funds as a loan.
Debit Your Cash Account.
The main reason for debiting your cash account is to indicate the growth of your business account. It also lays the groundwork for future payments and legal processes, especially those that affect your financial relations with the business. You do this by creating an entry in your accounting journal to debit the money received into the business’s checking account.
Credit Your Personal Account.
The main reason for crediting your personal account is to prove the amount of capital you put into the business. Make sure the entry made to your equity account matches the entry showing the charge from your cash account.
This listing is important because the two accounts are supposed to balance and mirror each other. By ensuring that the entries balance each other, you can be confident that your transfer has been properly accounted for.
Reconcile Your Cash Deposit.
Ensure that the personal money you’ve invested into your business is added to the previous book’s cash balance. You should also underscore the new balance at the cash line portion of your balance sheet’s segment.
If you are new to accounting and this doesn’t make sense to you, don’t panic. There are countless online resources and accounting platforms that can walk you through each of these processes step-by-step. You could even hire an accountant to do it for you.
Reconcile Your Personal Money Deposit To Your Previous Equity Balance.
Reconciling your personal money deposit means adding the deposited money to your former account or stock balance. After reconciling the deposit, the amount should appear at the bottom of your balance sheet in the equity section. It is important to do this reconciliation because it will allow you to repay yourself in the future.
Conclusion.
Using personal funds to start your business may seem daunting, but all it comes down to is making informed decisions and keeping detailed records. Keeping accurate records will save you time and prevent major headaches when your business pays you back for the investment. So don’t skip these steps, thinking they are unnecessary. If you follow each step, your future self will thank you.
