Hard vs. Soft Credit Inquiries
Having good credit is a very important factor to getting a business loan. The higher your credit, the more loans you’ll have access to, and the better rates you’ll be offered.
Frustrating as it may be, applying for a business loan (or other sources of funding) can have a negative effect on your credit. Knowing the difference between soft and hard credit inquiries can help you keep your credit score intact while going through the loan shopping and application process.
How much can a loan application hurt your credit? And what’s the difference between a hard and soft check? Read on to find out!
Soft Credit Inquiry
Soft credit checks (or “pulls”) do not affect your credit.
Soft pulls can be performed without your permission, and do not leave a mark on your credit report. Typically, they’re performed by employers and creditors who want to verify identity and get an overall idea of your creditworthiness.
In the lending world, funders often perform a soft pull as a preliminary step, to verify identity and see if you are creditworthy enough to qualify for funding. If you are checking your rate via a lender’s website (usually the first step in a lender’s application process), chances are they’re performing a soft pull. Most lenders will tell you somewhere on the website if the preliminary application affects your score. If in doubt, you can always ask customer service.
Hard Credit Inquiry
Hard credit pulls do affect your credit.
These pulls are generally performed before creditors officially extend services or financing to you. Lenders (or other institutions) that perform a hard pull have access to your full credit history, which helps them make a decision regarding whether or not they can serve you.
A hard pull affects your credit in a couple of different ways. First, the inquiry has a small negative impact on your credit score. A hard pull will bring your credit score down by a maximum of five points. Naturally, multiple inquiries will have a larger effect than one.
Additionally, the inquiry is noted on your credit report. The inquiry drops off after two years, but in the meantime, future creditors who look at your report can see who else has been looking at your score. Some lenders have limits regarding a number of inquiries a credit report can have. If you have too many inquiries on your report, you might find it more difficult to get funding.
Hard pulls cannot be performed without your permission. That doesn’t mean you’ll never be surprised by a hard pull—many lenders hide the agreement in their terms and conditions (or an equivalent agreement). Although there are a few exceptions, almost all lenders will run a hard check before extending an official offer to your business.
You’ll inevitably need to authorize a hard pull on your credit before receiving loan offers. Fortunately, because so many lenders perform soft pulls before you get too involved in the process, many merchants can find a loan without a significant amount of damage to their credit score.
Check out these resources for more information on credit scores and business loans: