Most of us know that our personal credit scores affect our ability to get business financing. But is this come in reverse? Can getting a business loan hurt our credit score? In this article, we’ll explain how business loan applications can harm your credit score and how to minimize the impact.
What determines the impact of business loans to 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 to 5 points, whereas soft credit pulls have no impact on your score.
Hard Credit Check
A hard credit inquiry happens when a lender checks your full credit history. Every hard credit check can hurt your credit score by 1 to 5 points. 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.
Before you try to get business loans, you must ask the lender what type of credit check they will perform, they should inform you if they are doing a hard credit pull. We recommend that you apply with no more than 2 or 3 lenders when looking for a business loan. When you apply for a business loan, your credit score gets penalized every time a lender does a hard credit check.
Soft Credit Check
A soft credit inquiry doesn’t affect your credit rating. It is a summary of your credit report used by lenders to determine whether you are a good credit risk. Most often, business lenders will do a soft credit inquiry when you are shopping around for a loan and want a preliminary quote. 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.
Lenders That Do Not Check Credit
Though it’s not very common, there are business lenders who don’t check your credit score at all when deciding to give you a loan. They rely on other factors, such as the size of your business revenues, receive payments, your time in business, etc.
Since they don’t check your personal credit, applying for a loan with them won’t result in your credit being pulled and won’t hurt your credit rating.
It’s wise for business owners to shop around when looking for a business loan, but keep in mind to limit your rate shopping to a small handful of lenders, and check if they perform hard credit checks beforehand. Otherwise, your credit score could suffer and harming your ability to qualify for the most favorable loan rates and terms.