Most business owners know that their personal credit score affects their ability to get business financing, but did you know that the reverse may be true as well? When you apply for business loans, your credit score can take a hit, which can hurt your chances of qualifying and getting the best rates.
The impact on your credit score depends on whether the lender does a hard credit pull or soft credit pull. Hard credit pulls can lower your credit score by 1-5 points, whereas soft credit pulls have no impact on your score. In this article, we’ll tell you when business loan applications can dent your credit score and how to minimize the impact.
Summary of How Credit Checks Impact Your Credit Score
No Credit Check
Certain lenders that
evaluate factors other
than credit score.
Soft Credit Inquiry
pre-approval for a
loan or an initial
Hard Credit Inquiry
Before final approval
of a loan application
(some online applications
trigger hard credit
When Business Loans Can Harm Your Credit Score
A hard credit inquiry occurs when a lender checks your full credit history. When you first apply for a business loan to get pre-approved or to get a rate quote, most lenders will do a soft pull of your credit, which won’t hurt your credit score. After pre-approval, however, most lenders do a hard credit check if you want to move forward in the loan process.
Every hard inquiry can dent your credit score by 1 to 5 points. The exact impact on your credit depends on your credit health when the check is done, the size of loan you’re applying for, and the type of loan you’re applying for. Hard credit inquiries stay on your credit report for up to 2 years and are visible to other entities that check your credit, though the impact on your credit score wears off in about one year.
Under the Fair Credit Reporting Act, lenders with “permissible purpose” to check your credit (which includes the following) don’t require your explicit permission to run a hard credit check. However, you must initiate some kind of financial transaction, such as applying for a business loan or credit card, to trigger a hard credit pull. Also, if you ask the lender what type of credit check they will perform, they should inform you if they are doing a hard credit pull.
Tip: Minimize Rate Shopping
While a 1 to 5 point decrease per hard inquiry doesn’t seem like much, each inquiry adds up, so we recommend that you apply with no more than 2 or 3 lenders when looking for a business loan. If you apply for too many loans and your credit score takes a hit, you will qualify for less favorable interest rates and loan terms. We’re not saying you shouldn’t shop around, but keep rate shopping to a minimum.
The consumer credit agencies have special rules that minimize the impact to your credit score when you rate shop for mortgage, auto, and student loans. When you apply for a business loan, however, your credit score gets penalized every time a lender does a hard credit check.
Some lenders do a hard credit pull even to pre-qualify you and give you a preliminary quote, so be careful before filling out one too many loan applications. Fortunately, FitBiz Loans works with a variety of loan platforms that will initially do soft credit pulls so that there’s no impact to your credit score.
When Business Loans Have No Impact On Your Credit Score
There are two cases where applying for a business loan has no effect on your personal credit score. The first is when the lender doesn’t check credit history at all. The second case is when the lender does what is known as a “soft credit check.”
Lenders That Do Not Check Credit
Though it’s not very common, some business lenders don’t check your credit score at all when deciding whether to extend you a loan. They rely on other factors, such as your time in business, the size of your business revenues, and the way you charge customers and receive payments.
Examples of lenders that don’t check credit include the following:
- Kickfurther– An inventory financing lender that helps you buy nonperishable inventory that you have experience selling.
- Fundbox– Invoice financing company that lends up to $100k to businesses over 6 months old.
- Square Capital – A merchant cash advance for businesses that use Square POS.
- PayPal Working Capital – A merchant cash advance for businesses that use PayPal.
Since these companies don’t check credit, applying for a loan with them won’t result in your credit being pulled and won’t hurt your credit rating.
Soft Credit Check
Your credit rating also won’t be affected if the lender does a “soft” credit inquiry. A soft credit inquiry is a summary of your credit report used by lenders to determine whether you are a good credit risk. A soft credit inquiry doesn’t affect your credit score and is not visible to third parties that check your credit. It only shows up when you request a copy of your own credit report.
Most often, business lenders will do a soft credit inquiry when you are shopping around for a loan and and want a preliminary quote. However, if you decide to finalize your pre-approval offer, the lender will then follow up with a hard credit inquiry which can affect your credit score.
There are other situations where a soft inquiry occurs. For example, when you receive pre-approval offers in the mail for loans and credit cards, the company sending you the offer has most likely done a soft pull of your credit. The Fair Credit Reporting Act doesn’t require lenders to get your permission before doing a soft credit pull.
Every year, you are entitled to receive one free credit report from each of the three main consumer credit agencies. Requesting your own credit report is another example of a soft credit inquiry, and it won’t affect your credit score.
Your credit report will not show your credit score. If you’re interested what you credit score is, you can check here for free.
Note on Business Credit
In addition to personal credit, every business has a credit score. These credit scores are tracked by Dun & Bradstreet, Experian, and Equifax. Anyone can check a business’ credit history–all they need is the business’ name and address.
Since it’s so easy to check a business’ commercial credit, you won’t be penalized for inquiries into your business credit. Financing and credit-related inquiries may show up on your business credit report, but they won’t impact your business credit score.
It’s wise to shop around when looking for a business loan, but just try to limit your rate shopping to a small handful of lenders, particularly when those lenders perform hard credit checks. Otherwise, your credit score could suffer needlessly, actually harming your ability to qualify for the most favorable loan rates and terms. When in doubt if the lender is doing a hard or soft credit pull, simply ask!