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f you’re trying to get a business loan, your credit score can have a significant impact on your chances of success. Many factors affect your credit score, including applying for credit. When a lender checks your credit, it can lower your score by several points. Understanding how credit inquiries can lower your score can help you approach credit opportunities more strategically.
What is a hard inquiry?
A hard credit inquiry, commonly known as a "hard pull," occurs when a lender or financial institution checks your credit report to decide whether or not to extend credit to you. This is a standard procedure when you apply for business loans, credit cards, or even personal mortgages or loans.
When you submit a credit application, the lender requests your credit report from one or more of the major credit bureaus, including Equifax, Experian, or TransUnion. This request gets logged on your credit report as a hard inquiry.
A soft inquiry happens when your credit is checked for reasons other than lending. Examples include when you check your own credit, when a potential employer checks your credit as part of a background check, or when a credit card company pre-approves you for an offer. Utility companies, landlords, and insurance agencies also use soft inquiries to check your credit to gauge your financial reliability before entering into a contract with you.
Soft inquiries don’t affect your credit score. They're recorded on your credit report, but only you can see them. Lenders and other entities can’t.
How hard inquiries affect a small business
A hard inquiry can have both direct and indirect consequences for your small business, particularly when it comes to securing financing and managing cash flow. When you apply for a business loan, line of credit, or business credit card, lenders perform a hard inquiry to assess your creditworthiness.
Even a small drop in your credit score could affect the interest rates you're offered or your eligibility for financing. Lenders view a higher frequency of hard inquiries as a sign of financial desperation or poor money management, potentially categorizing you as a higher credit risk. As a result, you might face higher interest rates, less favorable terms, or even outright rejection of your credit application.
Less favorable loan terms mean you could end up paying more over the long term, which could strain your cash flow. Tighter cash flow can impact your ability to invest in inventory, hire staff, or take advantage of business opportunities, all of which can hinder growth.
Are hard inquiries permanent?
Hard inquiries are not permanent. They typically stay on your credit report for two years from the date it was performed. However, after approximately a year, your score should start to go back up.
Steps you can take to remove hard inquiries from your credit report
If a lender performed a hard credit inquiry without your permission, you can have it removed from your credit report by taking the following steps:
Step 1: Obtain your credit reports
First, request your credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. You're entitled to one free report from each bureau every 12 months through AnnualCreditReport.com. Review these reports carefully to identify any hard inquiries you didn’t authorize.
Step 2: Identify unauthorized inquiries
Make a list of hard inquiries you don't recognize or didn’t consent to. These are the inquiries you will target for removal.
Step 3: Contact the credit bureaus
Write a formal dispute letter to each credit bureau that lists the unauthorized hard credit inquiry. Your letter should include your full name and address. Clearly state that you did not authorize the hard inquiry and ask them to remove it. Send the letter by certified mail with a return receipt to document your communication.
Step 4: Follow up with the inquiring companies
Simultaneously, send a similar dispute letter to the company or institution that initiated the unauthorized hard inquiry, asking them to remove their inquiry and provide a statement confirming it.
Step 5: Keep records
Make copies of all correspondence and keep track of all communication, including the dates of any phone calls and the names of people you spoke to. This will be necessary if you need to escalate your case.
Step 6: Check for removal or correction
Once the credit bureaus and the inquiring companies have received your dispute letters, they generally have 30 days to investigate and respond. After this period, check your credit reports again to confirm that the unauthorized inquiries have been removed.
Step 7: Escalate if necessary
If the hard inquiry has not been removed after your initial dispute, you may need to escalate the matter by filing a complaint with the Consumer Financial Protection Bureau or by seeking legal advice.
How to mitigate the impact of hard inquiries
If you know you'll be seeking financing, plan accordingly to minimize the number of hard inquiries. For example, when shopping for a loan, submit all your applications within a 14 to 45-day period. Many credit scoring models treat multiple hard inquiries of the same type within this period as a single inquiry, lessening the impact on your credit score.
Be strategic about the timing of your credit applications. Spread them out as much as possible if they're unrelated, or bundle them into a short period if you're rate shopping. Regularly check your credit report to ensure that all hard inquiries listed are accurate, and dispute any you didn't authorize.
Takeaways
Securing financing can be pivotal in helping you grow or establish your business. However, it can be hard to qualify for traditional loans if your credit score isn’t high enough. Knowing what factors impact your credit score empowers you to make smart financial decisions for your business.
Novo Funding is an alternative to traditional business loans that offers up to $75,000 in fast, flexible working capital. You can apply online in less than 10 minutes and receive an answer in 24 hours. Once approved, you’ll have instant access to your funds. Apply today and unlock your business’s full potential.
Novo is a fintech, not a bank. Banking services provided by Middlesex Federal Savings, F.A.: Member FDIC.
Merchant Cash Advance products and services are offered by Novo Funding LLC (“Novo Funding”), a wholly owned subsidiary of Novo. Merchant Cash Advances require a Novo checking account.
Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.
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