Hard and soft pull credit inquiries for businesses
Applying for a business loan? Know the difference between hard and soft pull inquiries that check your creditworthiness.
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If you are considering a business loan, it’s important to know that your business will be subjected to hard and soft pull credit checks. This helps lenders get an idea of your business’s overall financial health and whether or not it’s in a position to make repayments.
This guide will help you understand the difference between a soft and hard pull credit check to help you keep your credit score high.
How do credit inquiries affect my chances of being approved for a business loan?
When you apply for a business loan, lenders will undertake a credit check to verify your business’s financial status.
Your personal and business’s credit scores are a major deciding factor for lenders. If a credit check reveals a weak credit profile, this will have a detrimental effect on your chances of securing a business loan.
Defaulting on payments or applying for several loans or credit cards within a short period implies impulsive behaviour and financial irresponsibility. Lenders also look at applications submitted to other lenders. If you’ve been refused credit several times in the past, this can damage your credit score and your business’s financial reputation in general.
The difference between hard and soft pull credit checks
Not all credit checks negatively affect your credit score. Lenders do two kinds of checks before approving or denying a business loan application.
Soft pull inquiries
Individual and business profiles are subjected to soft pull inquiries everyday without being aware of it. Lenders can do a soft pull check for an overall idea of your financial status before pre-approving your application, or credit bureaus can soft pull your file if you request your credit score.
Soft pull inquiries have no impact on your credit score, but may be noted as a file access.
Hard pull inquiries
Hard pull credit inquiries involve an official check of your credit report. When you apply for a car loan, personal loan or home loan and allow a lender to check your credit file, the lender will conduct a hard pull. While soft pull inquiries have zero effect, hard pull checks are listed on your credit file and therefore can affect your credit score.
Every hard pull credit check is listed on your credit report, including which lenders have denied previous applications and how many times you’ve applied for loans in the past. Too many hard pull inquiries in a short space of time can negatively impact your credit score.
You have to give the lender permission to conduct a hard pull inquiry. Before submitting a loan application, make sure that your business meets all the criteria and has a good chance of being approved. While a hard pull will reflect on your credit report either way, carefully considering your loan options can help avoid adding rejected applications to the list.
Limiting the damage
- Keep an eye on your credit file. You can request a copy of your credit report for free, once a year to get an accurate idea of your financial status. This counts as a soft pull check, so it won’t impact your credit score.
- Check the lending criteria. Since every hard pull is listed on your credit profile, check that your business meets the lending criteria before submitting an application. Only apply for loans that you have a good chance of securing.
- Limit your credit applications. Be selective about where you apply and how many applications you submit. Multiple applications to different lenders shows desperation and irresponsibility, neither of which inspires lenders’ faith.
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If your business has a few outstanding invoices, invoice financing can help manage your cash flow and get access to funds you need. It's a type of business loan that is secured by the unpaid invoices and comes with reduced risk, no asset requirements or interest payments.
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