5 Important Questions Business Owners Need to Ask Before a Hard Credit Check & How it Could Impact Business Loans
Source: Dana Rivera
Debt can be an essential part of financial strategy for many business owners, as it can be used in investment purposes or in scaling up profits. However, getting business loans approved can be quite a challenge, as banks and financial corporations nowadays haven’t been particularly generous. According to a report from US News, only 30% of businesses that applied for financing last year got the amount they asked for, down from about 50% in 2019.
Credit checks play an important part in getting business loan applications approved. This is why business owners should be mindful of their own finances. So with that in mind, here are five important questions to ask before getting your credit checked.
Have I been taking care of my finances and my credit score?
In our feature ‘5 Important Questions to Ask Before Seeking a Loan’, we advise readers to be aware of their credit score, available funding, existing debts, and any collateral you might own. You should also look back on past credit reports to check whether you’ve had any recent hard checks. First and foremost, try to get this question answered by getting a good idea of where your finances currently stand.
What are the differences between soft and hard checks?
While both are methods used to check your entire credit report and determine whether or not you’re eligible to be given a loan or credit, there are a few differences. A post on Upgraded Points titled ‘Hard vs. Soft Credit Checks’ explains that soft checks are performed when a company wants to assess your account’s eligibility for promotional offers, or to confirm whether or not you can continue to meet the conditions of the account.
But unlike soft checks, hard checks will require an application and won’t be executed without your approval. Often, these include applications for a line of credit, business loans, mortgage, and others. Because hard inquiries show that you intend to take on even more payments, they have quite a negative effect on your credit score depending on how many are performed at a time.
Do business loans require a hard or soft check?
Hard checks will always be performed for business loans from the bank. Applying through a fintech marketplace, however, may let you bypass hard checks in the early stages. Forbes reports that this has become an increasingly popular method for small businesses to acquire funding. These marketplaces will initially pull a soft check and offer you various business loans that they think will be suitable for your finances before finalizing through a hard check.
What are some of the long term impacts of a hard credit check?
Hard checks can lower your credit score by up to 5 points. And although they won’t stay on your credit report forever, they can remain for up to 2 years. On the bright side, they’ll only affect your credit score for about a year. After that time period, your credit score should go back to its original state. This is why hard checks should be kept at a minimum, and why business owners should know when to take advantage of soft checks before committing.
How can I raise my credit score as a business owner?
As mentioned, a healthy credit score will increase your odds of getting your application approved. This ‘How to Get a Bank Loan for Your Small Business’ guide on Business News Daily mentions that banks will want to know how reliable you are when it comes to paying off your debt. It’s best to keep your credit utilization rate below 30%, make your payments on time, and only apply for new credit when needed. This way, you can slowly raise your credit score in preparation.
Ask yourself the aforementioned questions before undergoing both soft and hard credit checks to get a better grasp of your finances. Lastly, use whatever resources are available to learn more about business loans you plan to apply for. This is a great way to make smarter financial decisions as a business owner.