Business Loan Credit Inquiries: Soft Vs Hard Inquiries Explained

Getting a business loan has changed a lot in recent years. In the old days, when bank lending was the only option, credit inquiries were everything. If you had a low credit score, but needed financing for your business, you were out of luck.

The advent of Fintech lending has changed everything. Now, there are plenty of options available for business owners with lower credit scores. A low personal or business credit score may not put you out of the running for business financing, but a high credit score can help you to qualify for better options. 

There are two types of credit checks that lenders can perform: soft pulls and hard inquiries. Understanding the difference can play a huge part in helping your business grow, and avoiding the wrong type of credit pull at the wrong stage. 

In short, hard credit inquiries have a negative effect on your credit score, while soft credit pulls have no effect. But, there’s a lot more to it than that.

What’s a Soft Credit Pull?

A soft credit pull, also known as a soft credit inquiry, is the consequence-free way to check your credit. Most lenders will not use a soft credit pull when finalizing your business loan agreement. However, lenders often do a soft pull when checking your credit in the pre-approval stages. 

Soft inquiries are also common in your personal life. For example, if your potential new employer is performing a background check, then they may do a soft credit pull to gauge your level of responsibility.

If you use a tool like Credit Karma to check your own credit, then this is also a soft inquiry. Soft inquiries are not visible to creditors or lenders. Instead, the record will only be visible to you.

The key difference between a soft and hard pull is that a soft pull is not associated with a specific application, debt, or payment obligation. Because of this, soft pulls are not emblazoned on your credit history, and pose no danger to your potential to qualify for financing. 

Soft credit pulls are an easy, stress-free way to keep track of your credit score, which can greatly impact your financial freedom. Surprisingly, more than 50 million adults didn’t have a credit score in 2015.

What Information Is on a Soft Pull Credit Report?

Contrary to popular belief, soft credit pulls and hard credit inquiries show the exact same information. 

This includes your entire history of loans, payment histories, and collections (if you’ve had any in the past). 

The only difference here is that soft credit pulls you run on yourself will only appear on credit reports that you run on yourself.

What’s a Hard Credit Inquiry?

Hard credit inquiries are the second, more precise way to measure your creditworthiness when you apply for a business loan. When a lender runs a hard inquiry on your account, it will affect your credit score. 

Hard credit pulls require your permission, so if you’re searching for the best business loan, they shouldn’t come as a surprise.  

They’re generally not used “in place” of soft inquiries. Soft credit pulls are generally performed in the earlier stages, for “pre-approval”. Hard credit pulls, on the other hand, are performed after you file an application, when you’re approaching the final stages of obtaining the loan or insurance policy you’re looking for. The three major credit bureaus run these credit reports, meaning the information they gather is more credible than a soft pull.

Because hard credit inquiries show that you intend to take on new payments, they can have a negative effect on your credit score. While the decrease in credit won’t be substantial, it’s important to be mindful of this as you search for a small business loan. 

Lenders may be cautious of opening up a new deal with you if you have too many hard credit pulls in a short period of time. However, many lenders understand that it’s natural for consumers to “rate shop”, and won’t judge you for multiple inquiries of the same type.

How Long do Hard Inquiries Stay on Your Credit Report?

Fortunately, hard credit checks won’t remain on your credit report forever. 

On average, hard inquiries will stay on your report for about two years. But on a positive note, hard credit inquiries will only affect your credit score for about one year. This means that after about one year, once your credit score should bounce back to its original state (barring any other influence on your credit).

How Many Points Does a Hard Credit Inquiry Affect Your Credit Score By?

It’s no secret that hard inquiries can cause a ding on your credit score. But fortunately, for business owners interested in financing but reluctant to kill their credit score, the drop is far from significant. 

In many cases, hard pulls will only take up to five points off of your credit score. Lenders will rarely consider these five points to be a “make-or-break” factor when it comes to small business loans, but every point can help.

As we mentioned previously, your credit score won’t suffer multiple times from multiple inquiries of the same nature. But, if you attempt to get a loan, a new insurance policy, and a new credit card all in a short timespan, then this could become problematic.

Do Business Loans Require a Soft or Hard Pull?

That depends entirely on the type of lender you go to, and the small business loan that you’re applying for. 

Bank business loans require an application, and therefore a hard credit pull. There’s unfortunately no way to get around this. 

On the other hand, applying through a Fintech marketplace may help you avoid a hard credit inquiry, at least in the early stages.

These marketplaces tend to work with many lenders (National works with 75), and are familiar with the guidelines and standards of each. Once you apply, they’ll generally do a soft credit pull. After running your credit report, these marketplaces determine and compare your small business loan options quickly and efficiently. If at all, they’ll only do a hard credit inquiry once you’re finalizing the contract.

By applying for your small business loan through a Fintech marketplace, you can prevent a drop in your credit score during the time when it’s most important. 

Before Approving a Credit Check, Inquire Which Type It Will Be

Whether you’re taking out a new insurance policy or business loan, always ask what type of credit check is involved.

By default, the lender might run a hard credit report. But if you ask about the possibility of running a soft credit pull instead, then you may save your credit score from dropping unnecessarily.

Either way, it’s helpful to know how lenders are evaluating your credit score.

Get the Financing You Need (Without Top-Notch Credit)

Whether you have a perfect credit score or are just coming off a not-so-great streak, the Business Financing Advisors at National can help! 

Get started right away by filling out our 60-second application

National Business Capital & Services is the #1 FinTech marketplace offering small business financing and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.

Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.

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About the Author, Matt Carrigan
Matt Carrigan is the Content Writer at National Business Capital & Services. He loves spending every day creating content to educate business owners across every industry about business growth strategies, and how they can access the funding they need!