Financial Advice for Small Business: 5 Myths to Avoid

Key takeaways

• Separate your business and personal finances and cards from day one to protect your credit and simplify taxes.
• Start saving for retirement early so compound interest has years to grow your money.
• Skip the storefront when starting out and build an online presence for far less money.
• Weigh a business loan against a personal loan carefully, since each affects your credit differently.

Bad advice #1: “It’s okay to use your personal credit card to pay business bills.”

Let’s make this absolutely clear: this is never ever a good idea. While it’s technically possible and legal to use your personal credit card to pay business expenses, it will do you and your business a real disservice.

Covering your business bills with your personal card is bad for business because:

• It makes tax season an even bigger challenge. When you use the same card for both business and private transactions, you can quickly lose track of which is which. This means you could miss out on tax deductions you’re entitled to. You might also forget to bill your customers for reimbursements on transactions made on their behalf, for example, door-to-door delivery for those super urgent documents that need signing.
• Personal cards have lower credit limits. Running a business is expensive and requires large amounts of accessible funds for purchasing equipment, services, and supplies. That is why business cards have significantly higher limits that are suited for the needs of a growing business.
• It weakens your legal protection. Incorporating as a business has many benefits including protecting the owner (that’s you) from financial liability. This means your personal assets are protected from being seized if, for example, your business gets into debt. If you use the same card for both personal and business expenses, you’re at risk of piercing the corporate veil, giving creditors cause to go after your own finances, car, or home.
• You’re not building your business credit history. If, at some point, your business needs a cash infusion, potential lenders, as well as investors, will want to review its credit history. It’s part of the due diligence process and is meant to establish trust and assure these third parties that their money will be in good hands. So, if you’re using your personal card for business purchases, you might find it difficult to secure funds in the future.

There really aren’t many good reasons to use a personal credit card for business transactions. Still, if you are unable or unwilling to get a business card and prefer to use a personal one, make sure to use separate cards for each type of transaction—it’ll save you a massive headache in the future.

Similarly, it’s worth understanding business checks vs personal checks, since choosing the right account for payments is another way to maintain proper separation.

Bad advice #2: “There’s no need to separate business and personal finances when starting a small business.”

Separate your business and personal finances from day one. Mixing them makes tax season harder and your books unreliable. A bookkeeping expert explains why:

“If you’re starting a business, make sure to immediately separate your business and personal finances. There are so many reasons for this, but for one, it’s going to make your life way easier come tax season.

Even if you do absolutely nothing with your bookkeeping throughout the year, which I don’t recommend, you can simply pull your bank records and know this is everything that came in and out of your business. This will only work, however, if you separate your personal and business expenses from the get-go.”

Bad advice #3: “Don’t start saving for retirement until you’re 60.”

This advice is not strictly relevant to business owners but to every single adult out there. And, it’s so blatantly wrong that we felt we just had to respond to it as a public service.

Let’s start off by saying: We get it. When you’re in your 20s or even 30s, retirement seems a lifetime away. That’s probably why, according to the Federal Reserve, only 35% of non-retirees felt their retirement savings were on track in 2024. But, trust us, retirement is coming, whether you like it or not, and it’s expensive.

While it’s tempting to have more cash on hand now, you must also consider what your life would look like later on. You will always need to pay for living expenses, groceries, entertainment, medical treatments, and travel, even when you’re no longer able to work. Starting to save at an early age (or today, at the latest) is the best way to ensure you can afford the necessities (and pleasures) of life in your golden years.

There are a lot of reasons to start saving early but the most important one is compound interest. Money doesn’t grow on trees but it does grow with time in savings accounts. Essentially, the longer your money is deposited in a pension fund the more it will be worth when you retire. This is thanks to your new best friend, compound interest.

Compound interest pays you interest on both your deposit and your past interest. Deposit $100 once at a 10% yearly return, and you’ll have $110 after year one. After year two, you’ll have $121. In 10 years, that single $100 grows to $259 without adding another cent.

Now, let’s break this down with a retirement-specific example. Say, you and your twin brother both deposit $4,200 into your retirement funds every year and enjoy the same annual return of 7%. The only difference is that you started saving at 22 and your brother only started at the age of 32.

By the time you both reach retirement at 67, your brother will only have $580,595 but your fund will be worth over $1.2 million. That’s almost twice as much. Not bad for an additional investment of just $42,000 spread over 10 years, right?

Even if you only have a small amount to deposit at the moment we really can’t stress enough how much better off you’ll be if you start saving sooner rather than later. To see just how much your deposits may be worth over time, you can use the SEC’s handy compound interest calculator.

Bad advice #4: “To start your own business, you need a storefront.”

This one is a bit outdated. It seems the advisor is a few decades behind on technological advancements such as online shopping and social media marketing. You don’t need a storefront to start. Selling online first lets you reach more customers for a fraction of the cost.

Many businesses, from retailers to startups, were launched in an entrepreneur’s garage or kitchen. If you have a good product, it’s better to invest in creating an online presence on as many channels as you can, including a website, a virtual store, social media, and online ads. These channels help you reach a lot more people with a much smaller initial investment. And, you can always open a physical store later, once your business is more established and you can get better credit.

Sabrina also noted how the world has changed in recent times making physical commercial spaces less crucial:

“One of the things we learned over the past few years is that you can start your business at home. You don’t need to invest in a storefront to start your business. Don’t let not having a brick and mortar space stop you from showing your products to the world.”

Bad advice #5: “Take a personal loan to start your small business.”

This one is actually not as clear-cut. We’ve found experts who say it makes sense in some situations and others who advise avoiding a personal loan for business purposes at almost all costs. To help you decide what type of loan is best for your particular situation, let’s outline some of the reasons you may choose one over the other.

Business loans usually require documentation. Lenders often ask for tax returns, pay stubs, and some form of security. If you’re just starting out and looking for initial funding for your business, you may not have any of these yet. In this case, you can opt to get an unsecured personal loan based on your own credit history, until your business is more established.

It’s important to remember, however, that a personal loan affects your own credit score. This means that if your business doesn’t get off the ground as quickly as you planned and can’t meet the payments, it affects your eligibility for personal credit, for example, a new credit card or a mortgage. A business loan, on the other hand, is based on your business’ credit score and history and shouldn’t, under normal circumstances, affect your personal credit.

Another reason to prefer a business loan is that its credit limit is typically higher than a personal loan. When weighing funding options, it also helps to review how you make payments—such as understanding what are some advantages and disadvantages to paying with checks compared to electronic methods. As we’ve already said, running a business takes large amounts of cash, so if your business plan requires an investment of more than $100,000, which is above what most personal-loan lenders will fund, you’ll have to apply for a business loan. The Small Business Administration (SBA) offers government-backed business loans of up to $5 million, so that’s a great place to start if you need more funding.

If you take a personal loan, read the terms first. Confirm you can use the funds for business, and tell your lender your plans upfront. It’s best to tell the lender directly what your plans are, to make sure they are on board. Another thing to remember in this case is that the business will still need to repay you for the loan, just like any other lender, so your own financial resources aren’t depleted.

Smart financial habits that actually help your business

Good financial habits keep your business steady when money gets tight. A few simple routines make the biggest difference.

• Build a simple budget and check it every month so you always know what is coming in and going out.
• Watch your cash flow closely, since running low on cash is one of the most common reasons small businesses struggle.
• Set aside an emergency fund so a slow month or a surprise cost does not derail you.
• Track every expense and keep clean records to make tax season far easier.
• Ask an accountant or bookkeeper for help when things get complex, so you can focus on running your business.

Making the right financial decisions for your business

At Melio, we believe smart financial decisions help every business thrive, especially growing ones. Learning a little about your money each day pays off over time.

Get more tips on managing your small business finances on our blog. When you are ready to simplify how you pay bills and get paid, you can sign up for Melio to keep your cash flow under control.

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