How Credit Checks Can Harm Your Business and How to Avoid the Common Mistakes

Credit makes the world go around; almost every big purchase you make will involve some amount of credit.

In business, credit is essential for things to run smoothly. If you’re a small business, perhaps one of the 347,000 startups in the United States in the first quarter of 2022, then you’ve likely used a loan to get off the ground. There are several ways a startup can be funded, with credit being one of them. If you make purchases of any description, such as stock, you’ll have a line of credit with your supplier. If you want to expand, you’ll head off to the bank or another lender looking for the capital to do so. Credit is essential.

When you apply for personal credit, there are two types of checks you can be subject to, namely hard and soft credit checks. If you’re applying for a mortgage or a car loan, you’ll have a hard check, one that leaves a mark on your credit score, good or bad. If you’re trying to find out your own personal financial situation, you can have a soft credit check, one that leaves no trace. That same applies to businesses. The latter, a soft check, will cause you no harm, but a hard credit check can be extremely damaging.

Why is a credit check damaging?

Inquiries account for 10% of your credit score as a business, and failed inquiries negatively impact that score. For instance, if you applied for a line of credit with a supplier but it was refused, other lenders would see it had been refused, affecting your rating.

Sometimes, an inquiry on your score can be wrongly marked as negative, and an inquiry on a small business credit report can block access to loans. You might also find a minor infringement, such as a late payment on a line of credit, also impacts your score. If that infringement was satisfied but remained on your credit score, then subsequent checks could be turned down and cause more damage.

What are the common mistakes, and can I avoid them?

One common mistake is not having a firm grasp of your business’s credit score. As part of a robust financial policy, you should make regular soft credit checks on your business. As we’ve discussed, these will not impact your score, but they will allow you to address any issues that arise before a negative credit check is returned.

Also, it’s important not to keep applying for credit the first time you get refused. If a supplier won’t give you a line of credit for goods, you should first check why – is it your score? If so, address the issue, do not simply try another supplier. If there is a reason a negative response is being returned, simply applying for more credit via a hard check will exasperate the problem and cause a heavier, longer-lasting footprint on your credit score. Remember, an inquiry stays on your record for two years, which is something to consider if you’ve been refused for significant loans aimed at business expansion – it might be time to rethink your timeline for those future plans.

Another common mistake is letting your credit score get into poor shape in the first place. You can avoid a credit check causing damage simply by having good credit. Don’t take out loans you can’t afford to pay, so it is important to communicate with lenders if you are struggling, especially during the current cost of living crisis and never ignore a debt or financial problem. If you address issues before they reach your credit score, then future credit checks won’t negatively impact your business.


Running a business can be tough, and the last thing you need to contend with is a credit score being adversely impacted by numerous failed checks. By keeping a keen grasp on your finances and not applying liberally for credit after a refusal, you can ensure your credit score remains strong, and your business can continue to thrive.


1. What is a credit check?

A credit check is a review of an individual’s or business’s creditworthiness, typically used to determine whether to extend credit or approve a loan.

2. What are the potential risks of running credit checks on customers?

Running credit checks on customers may lead to a higher rate of default, unfair pricing, and a decrease in customer loyalty.

3. How can I avoid running unnecessary credit checks?

To avoid running unnecessary credit checks, review your policies and procedures to ensure they are compliant with applicable laws and regulations. Additionally, consider using alternative methods of evaluating creditworthiness, such as cash flow analysis or business references.

4. What are the potential consequences of running improper credit checks?

If improper credit checks are run, businesses may be subject to fines and penalties, as well as potential legal action from individuals whose rights were violated.

5. How can I ensure my credit checks are compliant with applicable laws and regulations?

To ensure compliance, review applicable laws and regulations related to credit checks and consult with an attorney. Additionally, consider obtaining a copy of the Fair Credit Reporting Act and familiarizing yourself with its provisions.

6. What criteria should I consider when evaluating customers’ creditworthiness?

When evaluating customers’ creditworthiness, you should consider factors such as their credit history, current financial situation, and ability to repay. Additionally, it is important to consider the customer’s credit score and any other relevant information.

7. What are the best practices for running credit checks?

Best practices for running credit checks include obtaining written consent from customers, using only reliable credit agencies, and securely storing any information obtained. Additionally, it is important to ensure that the credit check is fair and not discriminatory.

8. How can I minimize the risk of data breaches when running credit checks?

To minimize the risk of data breaches when running credit checks, use secure protocols and encryption when transferring data, and ensure that all information is stored securely in a protected environment. Additionally, use multi-factor authentication to access the system.

9. What should I do if I discover a mistake on my customer’s credit report?

If you discover a mistake on your customer’s credit report, you should contact the credit agency to dispute the error. Additionally, you should notify your customer of the error and provide them with any necessary assistance in resolving the issue.

10. How can I ensure that my credit checks are fair and not discriminatory?

To ensure that your credit checks are fair and not discriminatory, use objective criteria when evaluating customers’ creditworthiness, and take into account factors such as their credit history and current financial situation. Additionally, consider obtaining written consent from customers before running a credit check.

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