Marco Carbajo is the founder of The Business Credit Insiders Circle and Business Credit Blogger, the leading blog for business credit, business financing and step-by-step business credit building system.
Marco recently answered a few questions for us about how business owners can fund their ventures. Here’s what he had to say:
How did you become an expert in business credit?
I have 21-plus years of experience in the consumer and business credit industry including positions with Financial Education Services and About Money. I have been a guest lecturer on business credit for the Real Estate Investors Association in Michigan and USTaxAid.
I am a business credit contributor for Business.com and the Small Business Administration and editor forAbout.com’s Business Finance division. My articles and Business Credit Blogger.com have been featured in Dun & Bradstreet Credibility Corp., FOX Small Business, American Express Small Business, Business Week, The Washington Post, The New York Times and AllBusiness.com.
What are the most important lessons you’ve learned in your career about funding a business venture?
An important lesson I’ve learned is the power of business credit and the leverage it provides. The stronger the credit you have both personally and for business, the more options you have and the better the terms and rates you’ll receive.
If you run a company, your business credit profile is related to your reputation. With a strong business credit profile, I’ve learned that you simply have much greater access to financing opportunities compared to relying on personal credit alone.
Why should business owners consider building business credit rather than investing their personal credit or assets?
One of the main reasons to build business credit is to separate your personal and business finances. In addition to making filing taxes and tracking expenses easier, it helps you preserve the liability protections that you get from incorporating your business.
Building business credit is just as important as building and taking good care of one’s personal credit. In the business world, a company does not have a consumer FICO® Score. Instead, it has business credit scores, ratings maintained and calculated by business credit reporting agencies.
What are the risks to small business owners who finance their businesses with their personal savings or credit?
There are several risks associated with business owners using personal credit for business expenses. First, there is the risk of failing to properly separate business expenses from personal expenses. Secondly, by co-mingling business and personal expenses an owner makes filing taxes a challenge while potentially jeopardizing the protection of the corporate veil. Finally, by using personal credit for business expenses, a business owner is putting his own credit record at risk.
Where should business owners start when building business credit? What are the first steps they should take?
For starters, if you operate as a sole proprietorship one should incorporate the business and obtain a Federal Business Tax ID. Secondly, before you apply for credit make sure the corporate records, state filings and required business licenses are all up to date and accurate. Once the business meets corporate compliance it will be considered what we call "credit ready."
Next, focus on applying for credit with suppliers and pay all invoices on or ahead of the due date. This will enable the business to establish trade references that can be used on future credit applications as well as added to its business credit reports.
How can business owners and entrepreneurs make themselves more attractive to lenders?
First and foremost, ensure the company credit profile represents a real business. The information you supply about your company, its background, banking history and operations plays an essential role in the credibility and creditworthiness of the business. With a complete business credit profile, lenders will get an accurate portrayal of the business.
Consider submitting financials to business credit agencies such as Dun & Bradstreet. Financials that show an improvement in cash flow, current assets and net worth can have a significant impact to a company’s overall creditworthiness.
What are the most important questions business owners and entrepreneurs should ask credit card companies about their products?
Although perks and rewards play a role in the decision-making process more emphasis should be played on rates, and terms & conditions. Ideally, a business owner should prefer a card that carries high credit limits, a low annual percentage rate, and reports payment activity solely to the business credit reporting agencies.
What are the most common mistakes you observe business owners making when building business credit?
Business owners make the mistake of assuming that simply having good personal credit will be enough to obtain good business credit ratings. While lenders and suppliers may initially consider personal credit history, once a business pays its first invoice, it will begin building its own credit history.
Another common mistake is not establishing a diverse credit profile for the business. Business owners need to show that the company can handle various types of financing such as short-term credit, revolving lines of credit, installment loans, leases, etc."
What are good habits they should adopt to maintain good credit?
Pay all invoices on time. The promptness with which a business pays its bills is one of the key factors that impact business credit scores. For maximum impact, a business should pay invoices 10 days or more ahead of the due date. The greater the number of days a company pays sooner than terms the greater the impact. Secondly, aim to keep credit utilization under 50 percent with 30 percent being ideal. The fact is lenders want to see that a company can properly manage its debts. Low credit utilization may cause a lender to be more willing to extend credit compared to a company that is maxed out.
What are the biggest trends you’re observing in small business right now in regards to accessing loans, credit or other funding?
One of the trends I’ve observed when it comes to business financing is how lenders are now using several dimensions of real-time business data to base their lending decisions on. Factors such as business activity, social capital, seller ratings, online sales and web presence are all measurements being used to determine the amount of funding a company may qualify for.