Why separate business and personal finances?

As an entrepreneur, one of your most important tasks is to keep close tabs on your small business finances, which encompass everything from sales income to how much you’re spending on business expenses like stock, utility bills, and taxes.

This can certainly be a time consuming task no matter how small your enterprise is. But imagine trying to track your incomings and outgoings when all your personal transactions are part of the mix. 

With payments on rent, gym membership, supermarket trips, and Friday night drinks blurring the lines, staying on top of your business finances can quickly become overwhelming.

But simplifying your life isn’t the only reason to separate your business and personal finances. Whether you’re just learning how to start a business or looking to scale up a side hustle into a more professional enterprise,this guide will walk you through the many benefits of having a separate business account, and how you can easily get one from the comfort of your sofa.

Why is it important to separate personal and business finances?

It can be tempting to just trade using your personal account, but once you’ve separated your finances, you’ll immediately see how much clearer the numbers are, and how much more streamlined your budgeting processes become. 

You’ll also open the door to business-only financial services, enjoy more legal protection, and generally set your business up for future growth.

So, let’s drill down more deeply into the advantages of keeping your business and personal finances separate.

Greater clarity with payments

If you take card payments, as so many businesses do, the footprint of transactions can be tricky to track over time.

Whether you’re using a card machine,sending payment links,or taking card payments over the phone using a virtual terminal,a dedicated business account ensures all your cashless transactions are listed in one place, so you can easily check they’ve been properly processed and that your payment security hasn’t been compromised.

Better cash flow management

Keeping your business and personal finances separate is key to managing your cash flow effectively. With a dedicated business account, it’s much simpler to monitor how much money is coming in and going out on a regular basis.

Let’s say you’re running a food and drink stall at your local weekend market. By keeping your finances separate, you’ll know that whenever you consult your current account, you’ll clearly see what you’re making from sales and what you’re spending on things like ingredients, stall rental, and equipment, without the visual distraction of your personal financial dealings.

This will in turn make it much easier to check your profit margins, and create accurate cash flow statements which allow you to stay on top of your business’s financial health.

Improved record keeping and accounting

Having all business-related transactions in one place takes much of the hassle out of  effective bookkeeping for small businesses. 

Let’s say you run an online store selling DIY craft kits. Having all your business comings and goings – like sales income, material costs and shipping expenses – recorded in a dedicated business account means you can quickly pull out the relevant financial data at any point.

This makes doing your year-end accounts and filing tax returns much easier, allowing you to accurately claim any small business tax deductions you’re eligible for. 

Access to digital tools and automation

Using a business account often gives you access to handy tools that can simplify the way you manage your small business finances.

These can allow you to easily track expenses, categorise spending and upload receipts to streamline bookkeeping and tax prep. Some accounting tools for small businesses will offer the option to link with your business account, helping to automate your financial analysis tasks.

Whether you’re launching one of your online business ideas or opening up a retail premises. such tools simplify day-to-day operations management, freeing you up from excessive admin so you can focus more on growing your business.

Easier planning and budgeting

Since a separate business account gives you a clear picture of your income and expenses, it makes the process of drawing up your small business budget that much more straightforward.

This allows you to better plan for costs like advertising, software subscriptions, and even unexpected expenses, without personal transactions complicating your planning. 

If, say, you want to set aside money to spend on your latest marketing strategy for small business success, or researching what set up costs are involved for launching business ideas from home, then carefully assessing what your budget will allow is crucial, and having a separate business account will be invaluable for this.

Asset protection

Keeping business and personal finances separate can help protect your assets, though the protection you get depends on your business structure and the relevant legal requirements for starting a small business.

If you’re a sole trader, keeping personal and business finances separate is optional but a good idea for the reasons we’ve already discussed. However, because you and your business are legally the same entity,you’ll remain liable for losses and debts incurred by your business, regardless of whether your finances are separate or not.

For limited companies, a separate business account isn’t just recommended – it’s legally required. Since the company is its own legal entity, keeping your finances distinct also helps shield your personal assets if anything goes wrong financially.

In partnerships, a separate account requirement will depend on your partnership agreement. But keeping finances separate makes it much easier to manage contributions, track expenses, and lower the likelihood of disagreements between partners over who owes, and is owed, what. For Limited Liability Partnerships (LLPs), having a separate business account is mandatory.

If you’re unsure about which business structure is right for your venture, talking through your plans with a small business accountant or financial advisor can help.

Access to business-only financial products and services

Separating personal and business finances opens up access to services that can really help your business grow. For example, with a business account, you can often tap into funding options like cash advances,which can give your working capital a quick boost when you need it.

Plus, some small business grants and other growth opportunities – such as offering gift cards to attract new customers and boost sales – might only be available to businesses with separate accounts. Having dedicated finances makes it easier to take advantage of these opportunities when they come up.

On top of that, keeping your finances separate also helps you build a strong business credit history. This can be helpful for getting better financing terms down the road – whether through loans, credit lines, or even small business crowdfunding.

If you’re growing your enterprise with plans to eventually sell, mixed-up finances can also make things challenging when it comes to how to value a business.You’ll need clean, separate records for potential buyers, and sharing personal expenses could complicate the process or even lower your business’s value.

Boosts professional credibility

When clients, investors, and suppliers see that you manage your finances through a business account, it emphasises the fact that you’re serious, credible, and committed to what you do. This can go a long way in building trust, which is one of the pillars for running a business successfully.

For example, imagine you’ve set up a small catering business. When potential clients reach out about your services, being able to provide professional invoices and process payments through a business account instantly makes you look more reliable. Clients are more likely to trust that their event is in safe hands when they see that you handle transactions professionally.

Plus, when you’re planning how to get clients,having a polished setup can give you an edge over competitors. It can also help attract employees or partners who want to work with an organised and professional business.

Strengthens overall financial health

Keeping your business and personal finances separate helps you manage your money better on both fronts. When your accounts are kept apart, it’s easier to avoid dipping into personal savings for small business expenses, or using business funds for personal purchases.

That said, you can still claim business expenses paid from your personal account. For example, if you attend a small business networking event and cover some of the cost with your personal card, you can usually get it back as long as you keep hold of receipts.

How to open a business account

As we’ve seen, opening a business account helps you build a more professional and organised business. To get started, you’ll need to decide where to open your account. 

Whether you’re launching a full-time venture or exploring how to make money on the side,there are plenty of options – from traditional banks to merchant services specialists like SumUp.

The best option will depend on what suits your business needs. Keep in mind, eligibility requirements can vary by provider, but most require you to be 18, have a UK address, and be either the director of a UK limited company or a sole trader or freelancer registered with HMRC.

If your business falls into the high-risk merchant category, perhaps because your sector is deemed to be at greater risk of being targeted by fraudsters, you might need to explore specialist options that cater to your specific needs.

Once you’ve picked your provider, setting up the account is usually straightforward, and can be done online or in person, depending on the organisation. Here’s what you’ll typically require:

• Proof of identity – Your passport or driving licence will work.

• Proof of address – A recent utility bill or bank statement is usually fine.

• Business details – You’ll need to provide your business name, address, and sometimes a brief description of what you do.

• Company registration (if applicable) – If you’re a limited company, you’ll need your registration number and documentation from Companies House.

Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.