When you apply for a business loan, a business line of credit, an equipment loan, or any other form of growth capital, your lender needs to determine the risk of extending you funding. To do this, your lender will conduct a credit inquiry, also known as a credit pull, by requesting credit report information from a credit reporting agency.
It's important to understand the two types of credit inquiries: soft credit inquiries and hard credit inquiries. This blog article from Huddle Business Capital offers an overview of credit inquiries specifically for business owners.
A credit inquiry is a request made by your lender to evaluate your creditworthiness and decide if you qualify for business funding. The lender obtains your company's credit history from a business credit bureau, also known as a business credit reporting agency, such as Dun & Bradstreet® (D&B), Experian Business®, or Equifax Small Business®, which uses the PayNet® Report.
When reviewing your application, your lender may consider both your personal credit and business credit, especially if your company is new, you have a limited business credit history, or you are a sole proprietor or a single-member limited liability company (LLC). To do this, your lender will request your personal credit history from one of the three major credit bureaus: Equifax®, Experian®, or TransUnion®.
A soft credit inquiry functions differently for commercial loans. Lenders can review your personal credit information for the purpose of assessing commercial loans without impacting your credit score. In most business lending situations, your personal creditworthiness is just as crucial as your business credit.
Since a soft credit inquiry does not affect your credit score, you can explore business funding options with various lenders to find the best fit for your company’s needs and budget without lowering your personal credit score for each quote.
A hard credit inquiry occurs when you apply for personal loans, and some lenders may also use a hard credit inquiry when assessing personal credit for a business loan. This can happen in one of two ways. First, a lender may initially perform a soft pull to approve your business loan and then conduct a hard inquiry at the time of funding. Second, a lender may conduct a hard inquiry upfront, though this is rare.
During this process, your lender will conduct a thorough review of your credit history to evaluate your creditworthiness. This assessment helps them make an informed lending decision based on your credit profile, which includes your payment history, outstanding debts, public records (such as bankruptcies), and any recent hard credit inquiries.
A hard credit inquiry can temporarily lower your credit score by a few points, but this effect typically fades after a few months. Additionally, a hard credit inquiry will remain on your credit report for up to 2 years.
Every lender has its own process for reviewing applications and making credit decisions. For instance, some lenders may promote specific business financing programs that only require a soft credit inquiry from the time of application through to funding. In contrast, other programs may require a hard credit inquiry to complete the credit review, finalize documents, and disburse funds.
Therefore, don’t hesitate to ask your lender how they manage credit inquiries, and whether a soft credit inquiry could later turn into a hard credit inquiry during the process. Understanding this in advance will help you make an informed decision and avoid unwelcome credit-related surprises later.
While a soft credit inquiry does not impact your personal or business credit score, a hard credit inquiry does. If you make multiple hard inquiries in a short period, it can lower your credit score and create the impression that you are a high-risk borrower. Therefore, it's essential to limit the number of hard credit inquiries you make.
Some other ways to help protect your business credit include paying your company's bills on time, maintaining a low debt-to-income ratio, and regularly monitoring your credit report for errors or fraud.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind. Huddle Business Capital is not affiliated with nor endorses the companies mentioned in this article.