When business owners are looking for affordable funding, such as loans, one question they ask more than any other is (and you probably guessed it), "Will this affect my credit?"
It's an understandable question. Most people know that a hard credit inquiry results in a temporary hit to your personal credit score. And no one likes being penalized just for reviewing their options.
But the extent to which business owners avoid hard pulls--multiple times a day, our team is told to avoid any loan product that will do a hard pull--may be actively hurting their bottom line.
Hard Pulls Versus Soft Pulls
There are two main types of credit inquiries.
A "soft pull" or "soft inquiry" has no effect on your credit score--it's just a way for someone (it could be you, an employer, or a credit card company pre-qualifying you for a card) to check your credit score.
A hard pull is essentially the same thing--a check credit by a lender or creditor. But this type of inquiry shaves a few points off your score. (The exact amount depends on your credit history, including your current credit utilization).
And because your personal credit score is an important factor that lenders consider during the loan application process, you'll want to be aware of how many times your score has been hard pulled.
The Benefits of a Hard Pull
When seeking financing, there are a variety of routes a business owner can take. There are dozens of online lenders, offering all kinds of funding options (term loans, lines of credit, equipment financing, invoice financing, and so on). Some lenders do a hard pull on your credit when you apply with them; others just do a soft pull.
In a vacuum, assuming every lender offered the same product, at the same rates, available to you at the same time, a soft pull is preferable.
But sometimes the lender that does a hard pull will offer a financing product that makes more sense for your business, or is a better fit for your needs.
Take Kabbage, for example. A line of credit from Kabbage can be made available to you in as little as five minutes, if you're approved. Their lines go up to $250,000. And you make monthly payments (rather than weekly, or even daily) on what you draw.
Most other line of credit products--from lenders like BlueVine, OnDeck, Fundbox, and Fundation--can't touch this combination of speed and spending power.
But in order to qualify, you'll need to agree to a hard pull. And the number of people who avoid this temporary hit to their credit is frankly shocking. Our team at Fundera, a marketplace for small business financial solutions, runs into this dilemma multiple times a day, every day.
Are the lines of credit that require only a soft pull bad? Of course not. But they often max out at around $100,000 per line, or feature a small draw fee, or require weekly payments. For a company that struggles with uneven cash flow (and thus may have trouble paying weekly), or wants to undertake a major renovation project (where variable costs may require spending more than originally budgeted), the question of "Is this worth a hard pull?" is hardly a question at all.
When Hard Pulls Become a Problem
The occasional hard pull opens your business up to new financing opportunities. A pattern of hard pulls, however, is a warning sign to creditors that you're in search of financing that isn't there.
Remember: Many different entities can perform hard pulls on your credit report. Applying for an auto loan? Looking for a mortgage? A demonstrated (recent) history of hard pulls not only adds up to a substantial hit to your personal credit score, but it demonstrates to lenders that you are trying, and failing, to receive funding from just about anyone.
(Note that you can apply to multiple places, and if you get approved, FICO looks at all your applications as a single inquiry--since maybe you were shopping rates and wanted to see the best option. But if you get turned down, all of your inquiries may show up on your report.)
If you want a business loan and you recently applied for financing or other personal loans within the last six months, you may need to start with lenders who only perform a soft pull. And even then, that might not be a problem if your credit score is strong--only if you have a less-than-stellar score will you want to avoid hard pulls altogether.
The bottom line is that a couple of points off your credit score won't materially hurt your chances of getting a loan in the future. As a business owner, you should explore all options when possible when seeking financing--don't shy away from a product that requires a hard pull on instinct; consider what this option could do for you that others won't before exploring other possibilities.