Managing a business successfully is difficult because many problems can arise and demand different solutions. One of the common problems most growing businesses face is a lack of adequate financial resources to fund the current operations and future large-scale expansion projects.
Most companies resort to loan funding from financial institutions to prevent draining their cash flow. However, some still find it difficult to obtain credit because of various obstacles. For instance, the inability to raise security for a loan, the risk-averse attitude of banks toward new businesses or projects, and the failure to access capital markets.
Also, others may have a low credit score due to too many credit inquiries. The credit score assesses the potential of your business to generate enough revenue to repay the loan. Therefore, as a business owner, you can prepare your organization for unmatched growth by recognizing and overcoming such challenges.
What Is A Credit Inquiry?
A credit inquiry is a request to examine a borrower’s credit file, mainly to determine their eligibility for credit. Financial institutions usually put it up before lending. In addition, other types of entities, such as government authorities, insurance companies, and employers, may request your credit report for relevant reasons.
For example, your insurance firm may require it during insurance coverage or when setting premiums. The government may also need it to assess qualifications for licenses and other benefits.
Types Of Credit Inquiries
Below are the two types of inquiries:
- Hard Inquiries
A hard inquiry is a request for credit report information from a credit bureau agency for specific transactions, such as when you complete an application for a new business loan. Actually, it’s a necessary part of the loan underwriting stage before approval. Even so, the lender must have your consent to perform a hard credit inquiry.
Here are some other situations that may result in a hard pull:
- If you’re applying for a mortgage loan.
- If you’re applying to lease or rent a commercial property.
- If you’re applying for a new business credit card.
The credit report includes details such as your credit score, recent loan applications, and how frequently you request credit. This explains why hard inquiries may negatively affect your credit score. Multiple hard credit inquiries in the short term can be viewed as a strategy to increase the current credit, hence decreasing your credit score.
- Soft Inquiries
Soft inquiries are more like reviews or background checks that can be used to identify a borrower’s creditworthiness. Unlike hard inquiries, they’re not included on your credit report. Hence, soft inquiries don’t affect your credit score points.
Also, they’re not primarily related to a new line of credit. For instance, as a business owner, you can perform it to identify if a consumer qualifies for a loan or even big credit purchases. Therefore, it doesn’t affect the customer’s credit score.
Alternatively, you can partner with reputable soft credit check agencies like Softpullsolutions.com to help you produce more accurate and complete credit reports. Using credit reporting software, you can review your customers’ existing accounts and gauge their financial potential.
Using this software, you can also prevent several hard inquiries on your customers’ credit reports. In addition, you can perform a soft pull if you want to check your credit score and credit history as part of the performance evaluation.
How It Affects Your Business
Below are four effects of credit inquiries:
- Affect Your Ability To Get Good Loan Rates
Multiple credit inquiries in your credit report signal higher financial risk to creditors. For instance, applying for multiple credit cards within a short period might mean you’re desperate for credit or want to benefit from multiple sources of loans.
Credit enquiries may also indicate that you’re in some financial trouble and are looking for ways to manage your situation. This lowers your credit score, and lenders will be reluctant to give you credit.
However, some creditors may take advantage of your situation and use higher interest rates to protect themselves. By charging more, they can reduce the risks by recouping more of the costs in the early periods.
- Result In Fewer Credit Options
Reputable banks and other lending entities have high standards when assessing your eligibility for lending. And since several hard inquiries mean lower credit scores, you may fail to qualify for business loans or credit cards from these institutions. This reduces your credit options, and you may resort to funding from less-than-reputable lenders.
In addition, creditors are less likely to offer you promotional rates, discounts, and other decent offers on their credit products since they perceive you as a high-risk borrower.
- Influence Investors’ Perception Of Your Business
Investors can use your credit inquiries to evaluate whether you’re worthy of a new deal. Good credit history indicates that you’re capable of settling your liabilities on time and have the potential to grow in the long run. This makes an investor more interested and motivated to partner with your entity.
On the other hand, many hard inquiries can be perceived as a lack of financial planning. Hence, an investor may not feel secure enough to fund your business. Consequently, hard enquiries may cause them to lose confidence in your financial performance. Therefore, they won’t risk their resources if there are no lucrative returns on investment.
- Affect Your Insurance Rates
Usually, insurance companies check your credit score before an agreement to extend coverage. And many credit inquiries may be associated with poor financial health. Therefore, your insurer may view you as more likely to make a claim soon. So, to protect themselves from financial losses, most insurers charge higher insurance premiums than those with good credit history.
Hard Inquiries Can Lower Your Credit Score
FICO or Fair Isaac Corporation, one of the main credit-scoring systems, considers a borrower’s hard inquiries when calculating their credit score. Though hard credit inquiries reflect on the credit report for about two years, FICO only considers those from the last 12 months.
Hard credit inquiries can significantly impact the credit scores of borrowers with short credit histories and few accounts. For first-time borrowers, a hard inquiry may take off more credit score points than those who’ve built credit for an extended period.
How Many Points Can Multiple Hard Inquiries Slash?
Generally, hard inquiries contribute to 10% of your credit score. Therefore, they may not significantly impact your credit score more than other crucial factors like the amounts owed. However, multiple hard pulls can reduce your credit scores by about five points.
Notably, individuals or businesses with more than six inquiries on their credit report in a year are more likely to be in a financial crisis than those with no inquiries. Also, note that these inquiries can pile up, which may decrease your credit score points.
For example, if you apply for a mortgage loan in February and another business loan in March, you might experience a considerable reduction. Even so, in such situations, you can reduce the number of hard inquiries on your credit report through rate shopping.
Inquiries And Rate Shopping
This involves shopping for the best loan terms before agreeing on a loan offer. Luckily, some creditors offer a prequalification process that allows you to perform a hard check without affecting your credit score.
Also, FICO provides a considerable window of time for people and businesses to rate-shop either for mortgage or auto loans. It has various credit scoring models with different rate shopping periods, like 14 days or 45 days. If you complete your rate shopping over this short period, it can be recorded as a single hard inquiry on your credit report.
How To Manage The Effects Of Inquiries On Your Business Credit
Here are some ways to manage the impact of credit inquiries on your business:
- Apply for loans you’re qualified for: Though you’d want to leverage the best credit options available, it’s best to consider the eligibility criteria. Some financing options can be competitive with high minimum requirements for approval. For that reason, you’d want to only apply for loans that match your credit profile. This reduces the number of credit inquiries on your report improving your overall credit score.
- Know the difference between soft and hard credit inquiries: Soft inquiries most likely result from checking your credit or requesting a pre-approved credit and don’t affect your business credit score. On the other hand, hard inquiries are associated with a new financial obligation and may negatively affect your business credit score. Therefore, knowing the difference between the two can help you make informed borrowing decisions essential to building a good credit history.
- Understand when and how long credit inquiries remain on your profile: It’s best to monitor the number of times lenders have checked your credit so you can track your number of inquiries. This will also help you determine any errors or fraudulent activities in your account. As stated earlier, hard inquiries can stay on your profile for up to two years but can only affect your score in the first year.
- Improve your credit score in other areas: Credit inquiries only contribute some percentage of your overall score. Therefore, you’d want to build strong business credit in other areas like debt ratios and payment history.
Knowing the different ways to manage credit inquiries may help you understand how they can affect your business.
Usually, financial institutions do a credit check before making vital decisions like financial lending or giving out credit cards. Several hard inquiries may be perceived as an attempt to get many sources of credit that offer a higher risk.
On the other hand, few credit inquiries are associated with a good credit score. They indicate that you’ve handled your credit obligations responsibly in the past, and you’re more likely to repay a new loan on time.
Above are some ways credit inquiries can affect your business and how you can manage it. Therefore, as a business owner, you should build a healthy credit history to leverage the many opportunities this can bring to your business. Also, it’s best to partner with reliable credit agencies for efficient credit reporting.