Yes, Hard Inquiries Impact Your Business Credit Score

Posted at 09:16h in Small Business Financing by Kelly Hillock

A hard inquiry is when someone checks your credit score (either personal or business) with the major credit bureaus as part of an application for credit, such as a loan, credit card, or other form of financing. For business loans, they’ll use the three business credit bureaus Equifax, Experian, and Dun & Bradstreet.

Hard inquiries for both business and personal financing are different from soft inquiries in three ways:

Hard inquiries only happen when you formally apply for credit.

They lower your credit score in the short run.

Soft inquiries may not require permission. You must give your permission for a hard inquiry.

Hard inquiries only happen when you submit an application for credit, such as requesting a small business loan, business credit card, or supplier trade credit. Any time you apply for financing, it tells the rating bureaus that your company wants or needs credit to operate, thus making your business slightly riskier to lend to in the eyes of future lenders. It is the reason why your business credit score dips in the near term and why you must also give your permission for the inquiry to occur.

Soft inquiries happen for pre-approvals or promotional offers and you’re not actually applying for a specific amount of credit. Unlike with personal credit reports, anyone can check your business credit report. Competitors or potential investors may pull your business credit report without asking, but this will be a soft inquiry with no impact on your score.

Hard inquiries shouldn’t be a major concern, as they’re an important part of getting credit to grow your business. However, they can cause issues when they pop up unexpectedly. Here’s how you can fix mistakes and avoid problems in the first place.

How to Fix Hard Inquiry Mistakes

You can fix hard inquiry mistakes by going here for Experian, here for Equifax, and here for Dun & Bradstreet (for Dun & Bradstreet, you’ll need to sign up for their DUNS manager if you don’t already have an account). However, any valid hard inquiries cannot be removed from your account.

The credit bureaus don’t say how many hard inquiries are too many, but they do say the hit to your credit score is temporary. Experian tracks credit applications within the last 9 months, Dun & Bradstreet tracks for 12 months, and Equifax tracks for up to 2 years.

If you’re worried about having too many hard inquiries, proactively monitoring your business credit report can help.

Managing Business Credit to Avoid Hard Inquiries

Proactively managing your business credit report will help you avoid unnecessary hard inquiries, both by helping you find lenders where you stand a higher chance of approval and by using financing options that don’t generate hard inquiries.

Start by getting a fresh copy of your credit report directly from Dun & Bradstreet, Equifax, or Experian, so you know what inquiries are in your report. If you’re worried there are too many, ask the bureau for the date an inquiry will drop from your report and double-check to make sure it happens. Then you can plan to submit future credit applications after certain inquiries are off your report.

When you can’t wait for inquiries to drop off your report, take a recent copy of your credit report to a few different lenders and ask them if you have too many inquiries on your report before applying. This could tell you where you have a better chance of being approved, so you don’t have to risk adding another hard inquiry to your report by applying with a lender who seems unlikely to approve you in the first place.

Pro-Tip: For SBA loans, ask a lender to do a soft inquiry and share the report with you vs. a hard inquiry as the SBA uses FICO SBSS. FICO doesn’t offer reports directly to businesses, so the lender will be able to help. Then you can fix any issues that are reported.

Using alternative funding versus loans, when possible, will also help cut down on hard inquiries while still getting you credit:

Trade credit: Some suppliers will offer trade credit for inventory, materials, and other supplies based on a soft pull or no credit check at all. You’ll have to check with each supplier regarding whether they’ll do this though, since there’s no set guideline or rule.

Bonus-tip: Ask if they’ll report your payments to the credit bureaus. A potential downside is not getting the boost to your credit score if the supplier doesn’t report regular on-time payments to the bureaus.

Invoice factoring: This is where you sell your outstanding invoices to a 3rd party at a discount. There’s no hard inquiry from a credit check because you’re selling an asset, not borrowing money.

Accounts receivable financing: This type of loan avoids hard inquiry problems for your company since the loan is based on the creditworthiness of your customers and their likelihood to pay.

Equity financing: Equity financing is where you get money from investors in exchange for equity in the business. Investors might want to check your credit report before investing, but there is no hard inquiry required because this option doesn’t involve an application for credit.

Hard inquiries only happen with a formal application for business credit and the hit to your business credit score lasts up to a year at two of the three bureaus. Getting a copy of your report and talking to lenders about their requirements before submitting an application could help you avoid unnecessary hard inquiries, and alternative funding options such as trade credit, invoice factoring, and accounts receivable financing can get you funds without creating a new hard inquiry. When you see an error on your credit report, submit a dispute immediately using the links above. And that is how hard inquiries impact business credit scores.

QuickBridge does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.