If you’re a business owner on the hunt for your dream loan, it seems like a no-brainer to conduct a thorough search until you find the exact fit for your needs. However, while it may seem like a responsible course of action, applying for loans with several different lenders can actually ding your business credit score.
When you’re shopping for a business loan, it’s important to avoid getting too far into the loan application process before you’ve made a decision about which lender you’ll use. Otherwise, you may inadvertently lower your business credit score.
If you’re like most business owners, you may be inundated or even overwhelmed with mailers, phone calls and emails from lenders who want your business. All that information can make it difficult to determine how to choose a loan. Most lenders offer easy online applications, and while you’re still considering your loan options, you may start an application with an online lender.
That’s where the problem begins: That online application could trigger an inquiry into your personal or business credit score, and too many inquiries will negatively affect your credit score. Let’s dig into a few ways to protect your credit score while you’re searching for a loan.
Limit Your Credit Inquiries
When determining how to choose a loan, some business owners complete multiple applications. Those result in multiple credit inquiries appearing on your credit report, and because looking for new credit can be associated with higher-risk borrowers, those multiple inquiries may lower your credit score. By filling out multiple applications, you may unknowingly damage your credit.
Though, not every credit check is damaging to your credit score. Soft inquiries, or those that occur as part of a background check or you checking your own credit score, do not affect your score. However, hard inquiries, or those that involve a lender checking your credit to make a lending decision, do have an impact on your score.
For most people, just one extra inquiry on their credit report will result in a decrease of about five points in their credit score, according to myFICO. But if you’ve completed a number of loan applications resulting in several inquiries, lenders could assume you’re a risky borrower. According to myFICO, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.
Rather than applying for multiple business loans to shop for the best rate, focus instead on building a relationship with a lender who will work with you to meet your needs. While an online application may give you a generic rate and loan offer, when you have a positive relationship with a business lender, they can develop a deep understanding of your business and put together a loan package that will work for you and your needs.
It’s certainly important to stay informed of the different loan options available, but the time you spend trying to track down the perfect loan may be better spent first searching for the lender that will join you on the hunt.