​​The Hidden Cost of Business Loans: How Applications Impact Your Credit Score

A woman sitting at a desk looks thoughtfully at her laptop, with a glass of orange juice in the foreground, possibly working late into the evening.

Introduction

When starting or growing a business, applying for a loan might seem logical. However, many are unaware that simply applying for a loan can negatively affect your credit score. This is especially harmful to Black and Brown women, who face unfair financial scrutiny.

The Credit Check Trap

Most lenders perform a "hard inquiry" on your credit report when you apply for a loan. As new business owners, we often seek multiple funding options due to initial deficits. However, applying for multiple loans within a few months can significantly affect your credit score.

In early 2022, my credit score was low after spending 13 years abroad. When I applied for a British business bank loan for startup funding, my score dropped by almost 100 points.

Unlike a "soft inquiry," which doesn't affect your score, a "hard inquiry" can lower it by 5 to 10 points, especially if you apply multiple times in a short period. Beyond this, lenders often use algorithms to predict financial reliability. These algorithms, while efficient, can reflect biases from the data on which they are trained.

Research from Women's World Banking (2021) shows that these algorithms can discriminate against women, especially Black and Brown ones. The biases stem from historical data reflecting systemic inequalities, including gaps in income, employment, and access to credit. A 2023 study in AI & Society found that credit-scoring AI models often miss indirect discrimination, worsening the problem

Why It Hits Harder for Black and Brown Women

Financial exclusion has devastating consequences, but for Black and Brown women, the impact is even more severe due to two significant barriers hindering their access to credit.

• Higher Denial Rates:Repeated loan rejections intensify the sting of rejection, turning initial disappointment into frustration and eventually despair. This vicious cycle compounds the damage, making it even harder for Black and Brown women to overcome financial obstacles. Although not as formalized as in the US, "redlining-like" practices existed in the UK. Banks and building societies were less likely to offer mortgages to Black and Brown people or residents of predominantly minority neighborhoods, citing these areas as high-risk.

• Lack of Alternative Credit Data: Traditional credit models are flawed, ignoring informal lending systems that have long been a lifeline in minority communities. In many African cultures, women join "susu" savings clubs, combining their money to provide financial support to one another. In Latin American communities, "tandas" serve as a method for collective borrowing and lending. By ignoring these alternative credit data sources, traditional models overlook the financial strength and resourcefulness of Black and Brown women, worsening the credit gap and making it harder for them to access affordable credit.

My Final Thoughts

This system wasn't designed with us in mind, but that doesn't mean we can't navigate—and even reshape—it. Every application, every rejection, every lesson learned adds to a bigger foundation. We are not just business owners seeking funding. We are architects of a new financial ecosystem. In it, our stories, our resilience, and our innovations hold great value.

I'm Nanna Soenya Founder of Omegaseven Global which oversees our Fundhership Grant for balck and Bown women in the UK. Find out more

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