A high credit score improves your chances of getting approved for a business loan, but credit inquiries during your loan shopping process could lower your scores – how does that work?! The situation sounds like a catch-22, but you can minimize the negative credit impact of your search with a few strategies.
Understanding Inquiries
Your credit score reflects multiple factors, such as your credit utilization, age, account diversity and ratio of revolving credit lines. Credit inquiries can impact your credit score as well, although not every inquiry factors into the calculations.
If a lender says its inquiry won’t impact your credit score, it pulls a soft inquiry. The lender uses a soft inquiry to access information from your credit report to pre-qualify you for loan products. Most lenders specifically say “pre-qualification won’t impact your credit score”, so watch out for pre-qualification processes without this line. Lending Club is a good example of a lender who makes it clear that their pre-qualification doesn’t affect your credit, with the phrase “won’t hurt your credit score” right on the page. Perhaps an obvious statement, but definitely one you should be happy to see!
Lenders use hard inquiries when evaluating your credit file to process a credit or loan application. These inquiries impact your credit for one year and remain on your report for two. When other lenders see hard inquiries on your report, they get an idea of how many credit applications you made within this time span. You want to minimize hard inquiries on your report to lessen the credit impact of your loan shopping. Here’s where submitting a bunch of applications to hopefully have one accepted can work against you.
Research your options
One way to minimize your hard inquiries is by researching different funding types. Not all business loan products are created equal, so looking into the difference between funding types is an essential step in the funding process. Use Nav to break down the differences between loan types, see which options you will likely qualify for, and which ones work best for your business.
Narrowing the field
Once you know which type of business loan product interests you, it’s time to narrow down the playing field. Sure, you could apply to every potential loan offer you come across and hope to get a hit, but that’s like dating everyone who ever asked you out. You put in a lot of time, and end up worse for wear because of it. By being selective with your loan and credit applications, you generate hard inquiries only from lenders who will likely approve you.
Once you’ve narrowed down the field, consider gathering all the necessary documentation ahead of time and setting aside a block of time devoted to sending in your applications. A general rule of thumb is that you should limit your shopping to a two week (14 day) period. If credit bureaus see multiple hard credit inquiries of the same nature in a short period of time, they may be able to conclude that you are searching for financing and will count each application as just one inquiry. This is a great way to tilt the odds away from a damaged credit score.
There are so many business funding offers out there, it’s hard to figure out where to start on your own. Nav’s Marketplace gives you a way to narrow your selections down based on your personal and business credit score, industry, cash flow, and other aspects of your business. You can filter lenders based on the most important funding factors for you, such as funding speed, loan amount, business credit building, APR, and other factors. Our tool also explains what each lender needs for the application process, as well as what they look for in the approval process.
Navigating the business credit landscape without hurting your business credit scores is tricky, but not impossible. By understanding how inquiries work, what your funding options are, and the best business loan options for your situation, you keep unnecessary hard inquiries at bay.
This article was originally written on December 10, 2015 and updated on November 1, 2016.
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