Prospa partners may already be working with clients who are also sole traders looking to fund their next venture, plug a gap in cash flow or make essential repairs or purchases.

Many of them will rely on personal savings to do so. According to an RFi New Zealand SME Banking Council survey*, one in two sole traders use personal savings to manage their cash flow. On top of that, almost one in three hasn’t adopted any measures at all to manage their finances.

The good news is, two in three check their cash flow on a weekly basis – rather than fortnightly, monthly or not at all – compared to an average of 58% of small and medium business owners. But there’s always room to improve.

By educating your clients around the benefits of separating their business and personal finances along with the support of funding, you can help them keep their financial health stable – and grow.

We asked Craig Gardiner, CEO of Small Business Accounting, for his top three helpful tips brokers can use to help their clients.

1. Assess the risk

The first step is having your clients consider whether using personal savings is something they should do in the first place.

Craig says sole traders should always weigh up the risk versus projected return of using their hard-earned savings to cover a business shortfall.

“Measure up the rewards and returns from the input of savings,” he says. “Ensure that as many factors as possible are considered and play out scenarios. Conduct ‘what-if?’ assessments with varying outcomes, as there is a significant element of unpredictability with new ventures.”

It might even be worth suggesting your clients pitch in alongside a business partner. “Where possible, try to share some risk, perhaps with a business partner in a similar situation,” Craig suggests.

2. Consider all options

Craig suggests sharing some very forthright guidance with sole trader clients on how to effectively plan.

“The old cliche is true,” he says. “If you fail to plan you plan to fail.”

Sole traders should look at the long-term plans for their businesses when weighing up funding options, considering as many planning strategies as possible, Craig says. He also suggests planning according to the growth cycle of the business – selecting funding options that suit the specific stage.

For relatively young businesses, a Line of Credit might help compensate for uneven cash flow and enable investment in stock, staff or small equipment, and Craig suggests counselling sole traders to go into any investment with a solid plan.

Craig recommends a series of questions that will help sole traders to look at all their options before adding more equity:

• What does your business plan say?
• What does your budget say?
• If you need to put more money in, will it be as a loan?
• If so, does your cash flow forecast say when you are going to get it back?

3. Keep accounts separate

Craig’s advice on whether sole traders should keep their personal and business activity separate, or to consolidate in the single account, is unambiguous.

“Have separate bank accounts,” he says, and also suggests having separate operating and tax accounts, with one of every three dollars revenue going into the tax account.

So, whether your clients are in the first few years of operation or are more mature, before letting them join the one in two sole traders who funds goals through personal finances, have them consider Craig’s tips:

• Assess whether the potential rewards of dipping into personal savings are worth the potential risks.
• Consider a business partner to share the burden.
• Plan repayments alongside your cash flow forecast.
• Keep business and personal finances separate from day one – or get stuck into untangling them.

*RFI Global New Zealand SME Banking Council, May 2022