Individual Finance v Business Finance
09

Oct 2020

If you’ve been controlling your own personal finances for years, how tough can it be to transforming to managing your business’s finances? Finance is finance, right?

Not really. Learning the differences between business finance and individual finance and how to manage them accordingly is one of the biggest learning curves for all the business owners.

Individual finance and business finance might split a word, but that’s where the similarities come to an end. If you need to convince that you are not a business finance expert in spite of your expertise in personal finance, here we provide a guide to the differences between carrying on your finances and juggling money for a business.

Leverage

In Individual finance, you use diligence and wisdom to increase your wealth, whereas, in business finance, you use leverage. Leverage is the most important difference between individual finance and business finance. It is the procedure of multiplying gains, mostly by borrowing money.

Every business goes in for leverage at some point in time. It lets entrepreneurs set up the business and find success with lesser investment. It justifies that the ratio between their investment and their profits is much higher.

Using leverage in individual finance can mean terrible losses, such as in your house or even your car. In business finance, there are many circumstances where leverage makes solid financial sense. In fact, many businesses will use leverage at some point in time to establish their businesses or increase their profit margins.

Cash Flow

If you are determined about individual finance, you must have a personal cash flow statement that determines your inflows and outflows so you can establish a better budget. You require a similar document for your business, but it needs to be eventfully more accurate and detailed.

Cash flow problems are a significant cause of business failure. Your business might be booming at a point of time, but if your cash flow is unbalanced, your business will crash and burn.

Growth costs businesses a considerable amount of money, which signifies that the hardest years are normally the years when your venture is growing the fastest. In individual finance, you always need positive cash flow, but in business finance, you need not always want positive cash flow.

Profits

Profits and Revenues, Assets, and Liabilities are familiar with financial terms that operate radically differently in the field of business finance than in personal finance. Hence, it is vital that you avoid mixing your individual finances and your business finances after you start your venture.

Doing so increases the risks of every Business Finance or Individual Finance decision, jeopardizing both business and personal wealth at once. Still, you shouldn’t neglect your Individual Finance practices after you become an entrepreneur.

Individual Finance v Business Finance: Which one to use for small businesses?

The biggest challenge constituting start-up companies is finance and funding. With several options available, it can be formidable trying to choose the ideal type of funding. There is an option to favor every type of small business from personal loans to Business Cash Advances. Following are the pros and cons of Personal and Business finance options available for small businesses.

1.Personal Finance

When may people are starting their small business, personal finance is an option that they go for. When funding a small business, all the feasible options are saving, remortgaging, and taking out loans.

However, as we had mentioned above, one main concept that operates for business finance but not personal finance is leverage. If an organization uses leverage with business finance, and it fails, this will not have an effect on a person’s financial situation.

However, this is not similar to leveraging personal finance. Leverage with individual finance is highly insecure and could result in repossession of your homes and cars if you fail to repay your loans. Therefore, we recommend that personal finance is not used in financing a small business venture.

2.Cash Advances

Cash Advances are a significant way for small businesses to secure capital. Business Cash Advances are reasonable and also easy to apply fo.

Flexible repayments are made with respect to your card sales, offering a safe business cash advance with no hidden fees. With start-up companies being exceedingly busy, business finance allows for quick financing for any new business venture.

3.Bank Loans

For new businesses, traditional bank loans are even now the most popular disposition of business funding. You also need a strong credit history to register for a business bank loan. With the increase of peer to peer loans and business cash advances, there are several modern alternatives to bank loans.

 However, bank loans do provide higher security and are highly regulated.

4.Peer to Peer Funding

Peer to peer funding is a recent phenomenon. Peer to peer loans mainly allows fast funding, with marginally lower interest rates. Peer to Peer funding is also managed by the Financial Conduct Authority. This can be a vital option for small businesses that are seeking for quick funding with lower interest rates and are prepared to take on the risk.

5.Crowdfunding

Crowdfunding is another significant way for small businesses to obtain funding on their latest projects. The critical thing about Crowdfunding is that businesses are under no responsibility to pay back the money that has been donated.

While financing a small business can seem prodigious, always consider business finance over personal finance.

If you want to know more regarding individual finance and business finance, get in touch with our JAXA experts, who have in-depth knowledge and skill in global accounting and finance, and can assist you in overcoming the accounting challenges.

Contact us – we’d be delighted to help you.