How Applying for a Business Loan Can Affect Your Credit Score

Securing a business loan is a major step, but the application process can temporarily impact your credit score. Here’s a look at how each stage can influence your credit standing.

1. Initial Inquiry vs. Formal Application: Many lenders perform a soft inquiry for pre-qualification, which doesn't affect your score. However, a formal loan application triggers a hard inquiry, which can cause a minor, temporary dip in your credit score.

2. Multiple Applications: Applying with several lenders in a short time frame can result in multiple hard inquiries. Modern scoring models often bundle similar inquiries made within a few weeks, treating them as a single event to allow for rate shopping.

3. Taking on New Debt: If your loan is approved, the new account adds to your overall debt load. This can initially lower your score by increasing your credit utilization and decreasing the average age of your accounts.

4. Long-Term Payment History: The most significant impact comes over time. Consistently making on-time payments on your new business loan will build a positive payment history, which can substantially improve your credit score in the long run.

How Much Will Applying for a Business Loan Affect Your Credit Score?

When you apply for a business loan, the lender's inquiry into your credit can have varying effects on your score. Here are a few key factors that determine the extent of the impact.

• Hard vs. Soft Inquiries. A hard inquiry, which happens when you formally apply for credit, can temporarily lower your score by a few points. In contrast, a soft inquiry, like checking your own score, has no impact at all.
• Number of Applications. Applying for multiple loans in a short period can result in several hard inquiries, amplifying the negative effect on your score. However, some scoring models group similar loan inquiries together if made within a brief window.

How You Can Avoid Applying for a Business Loan Affecting Your Credit Score

Seek Lenders Offering Soft Inquiries

Many lenders allow you to pre-qualify for a loan using a soft credit inquiry. This process lets you view potential rates and terms without affecting your credit score, as soft pulls are not visible to other lenders and don't lower your score during the shopping phase.

Build Your Business Credit

Establish a strong credit profile for your business, separate from your personal finances. By registering with business credit bureaus and paying vendors on time, you can apply for financing based on your company's creditworthiness, potentially avoiding a hard inquiry on your personal report.

Incorporate Your Business

Formally structuring your business as an LLC or corporation creates a separate legal entity. This distinction helps separate business and personal finances, making it easier to obtain loans that rely on the company's financial health rather than your personal credit history and guarantee.

Ways to Improve Your Credit Score

Improving your credit score is an achievable goal, and with consistent, positive financial habits, you can see meaningful changes over time. Here are several actions you can take to start building a stronger credit profile.

• Set up automatic bill payments. Since payment history is the most significant factor in your score, automating payments is a simple way to ensure you never miss a due date.
• Reduce your credit utilization. Aim to keep your credit card balances below 30% of your total available credit, as high utilization can signal risk to lenders.
• Monitor your credit reports. Regularly check your reports from the major bureaus for errors or inaccuracies that might be dragging down your score.
• Become an authorized user. You can get added to the credit card of someone with a strong credit history to benefit from their positive payment habits and low credit utilization.
• Diversify your credit mix. Lenders like to see that you can responsibly manage different types of credit, such as a mix of credit cards and installment loans.
• Limit applications for new credit. Each application can result in a hard inquiry that temporarily dings your score, so it's best to space them out and only apply when necessary.

The Bottom Line

Applying for a business loan can trigger a credit check, which may temporarily lower your score. The type of inquiry and the lender's policies determine the extent of the impact.

Frequently Asked Questions

Will a single business loan application tank my credit score?

Not typically. A single hard inquiry may cause a small, temporary dip of a few points. Multiple applications in a short time can have a more noticeable effect.

Do lenders check both personal and business credit?

Yes, most lenders will pull both scores. Your personal credit is especially important for new businesses, as it shows your history of financial responsibility to the lender.

How long does a hard inquiry stay on my credit report?

A hard inquiry from a loan application stays on your credit report for two years, but its impact on your score usually lessens significantly after the first year.