Do Credit Checks Lower My Business Credit Score?
If you own a small business or are considering starting one, you’ve likely heard about the importance of maintaining a good business credit score. A healthy credit score can help you secure loans, attract investors, and gain trust with suppliers. But what about credit checks? Do they hurt your business credit score? This question is crucial for small business owners who may need to apply for loans or lines of credit in the future.
In this blog post, we will dive into how credit checks work, whether they can lower your business credit score, and what you can do to protect your credit score. We will also offer some practical tips for adopting technology into your small business to help manage your finances effectively.
Let’s break it down in simple terms so that you can better understand how credit checks can impact your business and how you can use technology to stay on top of your financial health.
What is a Business Credit Score?
Before we talk about how credit checks might affect your score, it’s essential to understand what a business credit score is. Just like a personal credit score, your business credit score reflects your company’s creditworthiness and ability to repay debts. Lenders, suppliers, and even potential partners often look at this score when deciding whether to do business with you.
The business credit score typically ranges from 0 to 100, and a higher score indicates lower risk to lenders or creditors. Dun & Bradstreet, Experian, and Equifax are some of the main companies that provide business credit scores, and each has its own method of calculating it.
A good business credit score typically falls between 80 to 100, while scores below 50 may be considered risky by lenders. If you want to improve your score or maintain a healthy one, you’ll need to keep track of your business’s financial behavior, including your payment history, outstanding debts, and credit inquiries.
What is a Credit Check?
A credit check is a process where a lender, supplier, or other financial institution reviews your credit history to evaluate your creditworthiness. It helps them determine whether you are a reliable borrower and if they should extend credit to you.
There are two types of credit checks:
- Hard Credit Check (Hard Inquiry): A hard credit check occurs when a lender or financial institution reviews your credit report as part of the application process for a loan, credit card, or line of credit. This type of check is often required when you apply for significant forms of credit, such as business loans, lines of credit, or mortgages. A hard credit check will typically impact your business credit score temporarily.
- Soft Credit Check (Soft Inquiry): A soft credit check occurs when a company checks your credit report for informational purposes, such as when you prequalify for a loan or when you’re checking your own credit score. Soft checks don’t impact your business credit score. They are typically less invasive and won’t show up on your credit report as a hard inquiry would.
Do Credit Checks Lower My Business Credit Score?
Now that we understand what a business credit score and credit check are, let’s answer the question: Do credit checks lower my business credit score?
The answer depends on the type of credit check.
- Hard Credit Checks: Yes, a hard credit check can lower your business credit score, but the impact is usually temporary. When a lender performs a hard inquiry, they’re looking into your credit history to assess how much risk is involved in lending to your business. This review can cause a small dip in your credit score, typically by a few points. The reason why hard inquiries can lower your score is that lenders want to know if you’ve recently applied for multiple lines of credit. If a business has several recent credit inquiries, it could suggest financial distress or overextension of credit, which can make lenders nervous. However, the impact of a hard credit check is usually short-lived. Over time, if you continue to make on-time payments and maintain a low balance, your credit score will bounce back.
- Soft Credit Checks: On the other hand, soft credit checks do not affect your business credit score. These types of checks are often conducted by companies offering pre-approved credit offers or by you when checking your credit report. Since soft inquiries are less risky for lenders, they don’t typically impact your score in any significant way. This means that if you’re simply checking your credit score or exploring financing options without applying for a loan, it won’t hurt your credit score.
Why Do Lenders Use Credit Checks?
Lenders use credit checks to assess whether your business is financially stable and likely to repay any borrowed money. Since credit reports show your history of borrowing and repaying debt, they give lenders insight into how your business handles credit.
Lenders look at several factors in your credit report, including:
- Payment history: Have you paid your debts on time? A good payment history shows that you’re a reliable borrower.
- Credit utilization: This refers to how much of your available credit you’re using. If you’re using a lot of your available credit, it can signal to lenders that you might be struggling financially.
- Outstanding debt: A high amount of outstanding debt can indicate that your business is over-leveraged and may not be able to take on more debt.
- Credit history: The length of time your business has been using credit matters. A longer credit history generally reflects positively on your business, as it demonstrates experience in managing credit.
Who Can Benefit from Understanding Credit Checks?
Understanding how credit checks affect your business credit score is crucial for anyone who plans to apply for credit or loans. Small business owners and entrepreneurs are the primary beneficiaries of understanding credit checks, as your ability to borrow money or secure favorable terms on loans is heavily influenced by your business credit score.
Here are some examples of who can benefit from understanding credit checks:
- New Business Owners: If you’re just starting your business, you may be applying for your first business line of credit or loan. Knowing how credit checks impact your score can help you avoid applying for credit too frequently, which could hurt your score early on.
- Established Business Owners: Even established business owners with an existing credit score need to understand the impact of credit checks. If you’ve recently applied for credit and have seen a small dip in your score, you might want to focus on improving your financial standing before applying for any additional loans.
- Entrepreneurs Seeking Funding: If you’re an entrepreneur seeking investment or funding to grow your business, understanding how credit checks affect your score is essential. You want to be mindful of how many credit inquiries you make, as multiple hard inquiries can make you look risky to potential investors or lenders.
3 Tips for Adopting Technology into Your Small Business
Now that we’ve covered credit checks and how they affect your business credit score, let’s talk about how you can adopt technology into your small business to help improve your financial health and manage credit more effectively. Here are three technology tips to keep your business on track:
1. Use Accounting Software to Track Cash Flow and Credit
Adopting accounting software like QuickBooks, Xero, or FreshBooks can help you keep track of your business’s cash flow, expenses, and outstanding debts. These tools can help you manage your business’s financials efficiently, allowing you to:
- Monitor cash flow and identify trends in income and expenses
- Track outstanding invoices and pay bills on time to avoid late payments, which can hurt your credit score
- Set reminders for upcoming payments or credit obligations to ensure that you maintain a good payment history
By using accounting software, you can stay on top of your finances and make informed decisions about applying for credit.
2. Leverage Cloud-Based Credit Monitoring Tools
Cloud-based credit monitoring tools, such as CreditSignal by Dun & Bradstreet or Nav, allow you to monitor your business credit score in real-time. These tools give you insight into how credit checks, payments, and other financial activities are impacting your score. The ability to see your score in real-time can help you make quick adjustments if you notice any sudden drops.
Credit monitoring tools also alert you to any changes in your credit report, helping you keep track of hard inquiries and make adjustments as needed.
3. Use Digital Payment Systems for Faster Transactions
Using digital payment systems like PayPal, Square, or QuickBooks Payments can help you manage your business’s payments more efficiently. These platforms make it easy to accept payments from customers, pay vendors, and automate your invoicing process. By keeping transactions digital, you can track payments more easily, reduce late payments, and improve cash flow—all of which positively impact your business credit score.
Additionally, faster payments can help you avoid relying on credit too much, reducing the need to apply for loans or credit lines and keeping your credit score intact.
Conclusion
In summary, credit checks can impact your business credit score, but the effect is generally temporary. Hard credit checks can lower your score slightly, while soft credit checks have no effect. Understanding how credit checks work and how they impact your score is crucial for managing your credit and financial health.
For small business owners, adopting technology like accounting software, credit monitoring tools, and digital payment systems can help you manage your finances more effectively and reduce the need for frequent credit inquiries. By staying on top of your business’s credit and making informed decisions about applying for credit, you can maintain a healthy credit score and secure the funding you need to grow your business.
Remember, maintaining a good business credit score is key to securing loans, attracting investors, and building trust with
suppliers. Use these tips to stay informed and improve your business’s financial outlook.