When a company seeks financing, lenders often run a hard credit inquiry, which can lead to a slight and short-term reduction in credit scores. Since most small-business loans depend on the owner’s personal credit or require personal guarantees, business owners should understand how credit inquiries affect borrowing power and how to minimize their impact.
In this article, we’ll explain what hard credit inquiries are, how they affect the credit score, and the steps to minimize their impact.
What is a Hard Credit Inquiry?
A hard credit inquiry occurs when a lender or financial institution reviews an applicant’s credit report after they apply for new credit. It happens when an individual or a business applies for a loan, a credit card, a mortgage, or other financing.
The credit check is done to assess the applicant’s creditworthiness and determine whether to approve the credit and, if so, under what terms.
Hard Inquiry vs. Soft Inquiry
A hard inquiry happens if a lender looks at your credit report after you submit a credit application. A soft inquiry happens when you check your own credit report or when someone you authorize checks your credit without you applying for any new credit.
Both hard and soft inquiries show up on your credit reports; however, whereas hard inquiries might have an impact on your credit scores, soft inquiries won’t.
Common examples of soft inquiries include:
- A prospective employer carrying out a credit check on you
- A lender is prescreening you for loan or credit card offers
- A company where you already have an account, reviewing your credit
- Requesting a credit pre-approval that requires a soft inquiry
When renting a property, your credit check can be either a hard or a soft inquiry. If you are worried about the effects on your score, you may ask the landlord what kind of credit check they will perform.
How Hard Inquiries Affect Small Businesses
Usually, a single hard inquiry will only cause a small dip in your credit score. On the other hand, if you have several hard inquiries within a short span, lenders might get suspicious of your borrowing habits and decide to check your credit history more thoroughly.
Frequent hard inquiries may signal that a business is on the lookout for new credit, which, in turn, might imply higher financial stress or quicker growth. Based on the overall credit profile, these factors may affect the business’s eligibility for financing and the repayment terms offered.
However, hard inquiries are only one part of the lending decision. Lenders also review your payment history, existing debt, business revenue, cash flow, and overall financial health. Maintaining a strong credit profile and managing your finances responsibly can help reduce the impact of multiple hard inquiries.
Do Hard Inquiries Exist Forever?
Hard inquiries are not permanent. They usually remain on your credit report for a maximum of two years from the date they were made. However, after approximately one year, their effect on your credit score is generally reduced, and your score will probably begin to improve.
How to Remove Hard Inquiries from Your Credit Report
If a lender made a hard credit inquiry without your consent, here is what you can do to get it removed from your credit report:
Get Credit Reports
All the hard inquiries made under the business name will be recorded by the credit reporting agencies. Get all the reports from Equifax, Experian, and TransUnion. Review all the lenders or financial institutions that accessed the credit report.
Identify Unauthorized Hard Inquiries
Check your credit report for hard inquiries from any lenders you don’t recognize or inquiries made without your business’s authorization. Remember, a few lenders may show up under a main company or a processing partner. In that case, you need to identify the main company and confirm that the inquiry pertains to it.
File a Dispute
If you come across a hard inquiry on your credit report that you didn’t authorize or that is incorrect, you should file a dispute with the credit bureau that reported the inquiry. Explain very clearly why you think the inquiry is incorrect. Also, provide any proof that may help the investigation.
Contact the Lender
If the lender is legitimate, reach out to them personally. They may be able to confirm why the inquiry was made. If it is a mistake on their end, they will take the necessary steps to correct it.
Collect Supporting Documentation
If a dispute is raised, keep copies of all the communication and emails related to the submission. In some cases, a dispute may involve follow-ups and back-and-forth communication. At that time, having organized records can help avoid miscommunications.
Check for Removal
Once the investigation is finalized, make sure to check your updated credit report and verify that the unauthorized inquiry has been removed or at least corrected. Usually, credit bureaus inform you of the result after they finish their review.
Escalate If Needed
If the problem is still not fixed or is not showing up on your credit report, the next step is to escalate the dispute by lodging a complaint with the Consumer Financial Protection Bureau (CFPB). Also, go for legal advice if needed.
Ways to Reduce the Impact of Hard Inquiries
Though hard inquiries affect your credit score temporarily, there are several ways to reduce their impact. Some of the ways are mentioned below:
- Apply only when needed: Every credit request results in a hard inquiry. Limit unnecessary requests to prevent multiple inquiries over a short period.
- Use the 14-day window: For comparing and evaluating lenders for the same type of loan, submit applications within a short window (often 14–45 days) so that multiple inquiries may be treated as a single inquiry by many scoring models.
- Consider prequalification: Many lenders offer prequalification by doing a soft check. Therefore, if they give you this option, you can use it to compare your financing choices without your credit score being adversely affected.
- Strong credit habits: Always make payments on time and keep the credit utilization under 30%. These factors influence your credit score more than a single hard inquiry.
FAQs on Hard Inquiries and Credit Reports
Below are some frequently asked questions about hard inquiries:
Can multiple hard inquiries affect a business loan application?
Yes, multiple hard inquiries for different types of credit can influence a business loan application. Lenders view frequent credit applications as a sign that a business is under financial pressure.
Do hard inquiries affect business credit reports and personal credit reports differently?
Yes, there is a difference between personal and business hard inquiries. Personal ones affect your individual credit score, whereas business inquiries impact the company’s credit report. Small business lenders may also check the owner’s credit.
How do lenders evaluate hard inquiries during business financing decisions?
Hard inquiries are just one of the factors that lenders consider when evaluating a financing application. Other factors include payment history, existing debt, business revenue, cash flow, and overall creditworthiness.
Can prequalification help businesses avoid unnecessary hard inquiries?
Yes. Many lenders offer prequalification using a soft inquiry to estimate your eligibility before submitting a credit application that results in a hard inquiry. As soft inquiries do not affect the credit score, prequalification is a preferred option.
Should businesses delay multiple financing applications to minimize hard inquiries?
It depends. If you’re comparing lenders for the same type of credit, applying within a short rate-shopping window can help reduce the impact on your credit score. For different types of financing, spacing out your applications can help limit multiple hard inquiries and present a more stable borrowing profile to lenders.
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