Why you should wait 30 days to apply for a loan

You ran through an analysis and decided it’s time to borrow to boost your business. You paid off your old credit card balances and took steps to shore up your credit score. You scrubbed through your financial statements to make sure they are accurate and professional. Is it time to apply for the loan? Probably not just yet. Follow along to learn why you should wait 30 days to apply for a loan.

What happens when you apply for a loan?

The loan application process requires data from many sources to make a decision. Depending on where and how you apply, you may get an instant online decision or have to wait weeks for a reply from a traditional bank.

Regardless of where you apply for a business loan, the lender will review your loan application, financial information, and credit history before making a lending decision. If you have perfect credit, no balances, and strong finances, you shouldn’t have a problem getting approved. But it doesn’t always work like that.

Many businesses need a loan at exactly the wrong time. When you have high credit card balances, are strapped for cash, and need a little more working capital to get through the season, a loan may be just what you need. But in that situation, you might not come off as a great, low-risk applicant to the bank. This is where waiting to apply for a loan may increase your approval odds.

A zero balance doesn’t mean your credit score says zero.

Both personal and business credit scores factor in current balances on credit cards, lines of credit, and other loans. If you max out your credit card, the impact is even bigger. Armed with this information, you may think that you can simply pay off your credit card and apply for the loan right away. But the lender might still see your old, high credit card balance even though you paid it off. Some lenders have minimum credit score requirements, including those who offer SBA loans.

This isn’t because your credit report is wrong, it is because of delays in credit reporting. Each time you have activity on a credit card or other loan, your bank systems usually update within a day or so. But your credit report does not update as quickly or frequently as your account balances.

The credit bureaus track credit report data for over a hundred million Americans. Considering that many people have multiple accounts, it wouldn’t be feasible to update everyone’s credit reports on the fly.

Here’s how the credit reporting system works.

Considering the scale of it, the credit reporting system in the United States is quite impressive. Three companies, Equifax, Experian, and TransUnion, collect data from hundreds of millions of accounts and data sources for consumer credit scores. For business credit scoring, Experian, Dun & Bradstreet (D&B), and Equifax are leaders in credit scoring and reporting. But a lot happens behind the scenes to calculate those credit scores.

In most cases, every credit account you open is reported to at least one of the big three consumer credit bureaus. Every time you have activity on your account, your bank tracks that activity. Then, typically once every month, the banks will send updated information for each account to the credit bureaus. Because of this timing, it is possible for you to pay off a balance and have to wait a full month before your credit report is updated.

The timing might work out that your credit is updated the next day, but there is no guarantee. Also keep in mind that each lender reports on its own schedule, and might not report all accounts on the same day. If you pay off multiple credit cards, your credit report will likely change a few times before the final payoff is accounted for and your credit report and score jump.

Debt utilization makes up 30 percent of your personal credit score, which makes it the second largest factor in your score after payment history. Don’t underestimate the power it has to influence your score. If you can pay off all revolving credit accounts and wait for your credit report to refresh, you will be in much better standing for a new loan, assuming nothing else goes wrong with your credit in the meantime.

Wait for a 30-day cycle before applying for a loan.

Each time you apply for new credit, that credit application shows up as an inquiry on your credit report, which can lower your credit score. Don’t apply for a loan and get rejected. Pay off your debt, patiently wait a month for your credit report to update, then apply for the loan.

Nav is the only place you can immediately check your business credit across all three major bureaus. To help you plan for tomorrow, check out where you stand today.