Does Applying for a Business Loan Affect Your Credit Score?

Introduction

When entrepreneurs need funding to start or expand their business, a common financing option is to apply for a business loan. However, many wonder – does applying for a business loan affect your credit score? This is an understandable concern, since your personal credit score impacts your ability to get approved for financing and credit products.

In this comprehensive article, we’ll examine how does applying for a business loan affect your credit score, the different types of credit checks, and steps you can take to minimize any negative impacts to your score when seeking a loan.

How Lenders Evaluate Business Loan Applications

When you apply for a business loan, lenders need to thoroughly evaluate both your personal and business finances to determine if you qualify. This normally involves:

Reviewing your personal credit reports and credit scores – the major factors in assessing your creditworthiness.

Analyzing your personal financial statements, income, assets/liabilities, and tax returns.

Evaluating your business plan, financial projections, and growth potential if your business is a startup.

Inspecting the financial health, cash flow, and collateral of your existing business (if applicable).

By doing their due diligence on your finances, lenders are checking for signs that you can repay the loan responsibly. Key factors they look for include:

• Your payment history on existing debts and credit accounts.
• Mix of credit types (credit cards, auto loans, mortgages, etc.)
• Total credit utilization across accounts.
• Length of your credit history.
• Recent credit inquiries and new accounts.
• Business revenue, expenses, debt levels, and operating margins.

This allows lenders to get a complete picture of your creditworthiness before approving a loan.

Hard Credit Checks vs Soft Credit Checks

When assessing your credit for a business loan, lenders can perform either a hard credit check or a soft credit check:

Hard credit check – The lender accesses your full credit report from one or more credit bureaus. This type of check is recorded on your credit report and can lower your credit score temporarily.

Soft credit check – The lender checks your basic personal credit information without viewing your complete credit report. Soft checks are not visible to others and don’t affect your credit score.

In general, the actual business loan application counts as a hard credit check. However, pre-qualification with a lender may only require a soft credit check.

Here’s a breakdown of how hard and soft credit checks impact your credit:

Hard Inquiry	Soft Inquiry
Recorded on your report and visible to lenders for 12-24 months	Not visible to other lenders, so no impact on your score
Can lower your credit score, more so if you have a short credit history	Does not affect your credit score
Too many hard inquiries raises flags about your creditworthiness	No limit on number of soft inquiries
Examples: Loan/credit card applications, new utility accounts	Pre-qualification checks, checking your own credit

How Does Applying for a Business Loan Affect Your Credit Score?

Now that we’ve compared hard vs. soft credit checks, how can applying for a business loan specifically impact your personal credit score? Here are some of the potential effects:

The hard inquiry – This will appear on your credit report and can cause a small, temporary drop in your score – usually under 10 points.

Lower average age of credit history – Opening a new credit account lowers the average age of your total credit history, which can negatively affect your score. But this impact is generally minor.

Higher credit utilization – Your new business loan balance increases your total credit utilization. But overall utilization considers all your accounts, not just the business loan.

Potential new tax lien – If you default on the loan, the lender can file a tax lien against you, causing major damage to your score. But this only happens in cases of delinquency.

Potential foreclosure or repossession – Defaulting on the loan could also lead to foreclosure on business property or asset repossession, which significantly hurts your credit. But again, only if you default.

In most scenarios, a new business loan by itself only causes a slight temporary drop in credit score, assuming responsible repayment. But it’s important to consider the context of your overall credit profile.

Minimizing Any Credit Score Impacts of Applying for Business Financing

If you want to maximize approval odds and minimize credit score damage when seeking a business loan, here are some useful tips:

Maintain a strong credit score (690+ is often recommended) before applying. Lenders may decline applicants with poor/fair credit.

Only apply for the loan amount realistically needed for your business. Requesting huge loan amounts can seem risky.

Avoid too many loan applications in a short time span – numerous hard inquiries raises flags.

Pay down credit card and revolving credit balances before applying. This lowers your credit utilization ratio.

Resolve any credit report errors before the lender views them. Mistakes can drag down your score.

Ask the lender if they can do a soft credit check first or review only your business credit. This prevents unnecessary hard checks.

If declined, wait at least 3-6 months before re-applying and use the time to improve your credit profile.

With careful preparation and monitoring of your credit, you can get approved for the financing you need while minimizing any negative impacts to your score.

Checking Your Credit Score Before Applying

Before submitting a business loans application, it’s wise to check your personal credit score so you know where you stand. Here are some ways to check your score:

• Get your free credit reports and scores from AnnualCreditReport.com. This includes scores from Equifax, Experian, and TransUnion.
• Use free services like Credit Karma to view your VantageScore credit scores from Equifax and TransUnion.
• Check scores directly from the credit bureaus:
  • FICO® Scores
  • VantageScore Scores
• Many credit cards provide free monthly access to your FICO score on your statement.

Reviewing your credit scores from different sources gives you the full picture before applying for financing.

The Bottom Line: Does Applying for a Business Loan Affect Your Credit Score?

In most situations for borrowers with good credit, does applying for a business loan affect your credit score? Only minimally and temporarily. The hard credit check and new account creation may cause a small credit score drop. But responsibly managing the new loans and maintaining healthy credit habits can offset these effects.

With proper preparation and monitoring of your credit profile, you can apply for business financing you need with confidence – knowing it likely won’t jeopardize your credit standing in a meaningful way. Open communication with lenders and advisors is always recommended when making major financing decisions for your business.

References:

• https://www.experian.com/blogs/ask-experian/credit-education/score-basics/inquiries/hard-inquiry-soft-inquiry/
• https://www.nerdwallet.com/article/finance/credit-score-hard-inquiry
• https://www.businessnewsdaily.com/5693-apply-business-loan-hurt-credit.html
• https://www.thebalancesmb.com/how-does-applying-for-a-small-business-loan-affect-your-credit-score-4145786

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