Hard vs Soft Credit Checks: What to Know

If you’re a small business owner applying for finance for the first time, it’s crucial to understand how credit checks work. Lenders use these checks to decide whether to approve your application and what terms to offer you.

Credit checks come in two forms: hard enquiries and soft enquiries. Here’s what you need to know about both and how they can affect your chances of securing a loan.

Hard Credit Checks

A hard credit enquiry is when a lender reviews your credit history after you apply for finance. This is a formal check to assess your financial behaviour and risk level as a borrower.

When you apply for a loan, credit card or any other type of finance, the lender asks permission to make a hard enquiry. They will check your credit file to see details such as:

• Past loan repayments

• Current debts

• Defaults or missed payments

Each hard enquiry is recorded on your credit file. Too many hard checks in a short time may lower your credit score and make lenders more cautious about approving your application. This is because multiple applications can suggest financial difficulty or over-reliance on credit.

For small businesses, especially sole traders, lenders often look at the owner’s credit history and the business’s. It can hurt both profiles if you’ve had several hard checks in quick succession.

Soft Credit Checks

On the other hand, a soft credit enquiry is a preliminary check that doesn’t impact your credit score at all. Lenders use this type of search to determine whether you qualify for finance without committing to a full application.

Soft checks can happen:

• When you use pre-approval tools

• If a lender reviews your file for marketing purposes

• When you check your own credit score

Unlike hard checks, soft enquiries are only visible to you and not to other lenders. They allow you to assess your options without harming your credit score. They’re also a great way to compare lenders and understand what you might be eligible for before diving in.

How to Manage Credit Enquiries

Use Pre-Approval Tools

Many reputable lenders offer pre-approval tools that rely on soft checks. Use these tools to compare your options without affecting your credit score.

Avoid Successive Applications

Submitting applications to several lenders at once often means multiple hard enquiries. This is likely to harm your credit score. Do your due diligence and narrow down your options before applying.

Build Your Business Credit

If you’re a limited company, establish a separate credit profile for your business. Pay invoices on time, keep your credit use low and partner with suppliers who report to credit agencies.

Seek Professional Advice

If you’re unsure about your credit history or how to approach business finance applications, consider speaking to a financial advisor. They can help you understand your options and avoid the common mistakes.

Know Your Credit Profile

Familiarise yourself with your credit history by checking your score through a credit reference agency. This will help you understand your position before applying.

Key Takeaways

1. Hard enquiries happen when you formally apply for finance and will lower your credit score if done too often.

2. Soft enquiries let you assess options without affecting your credit score.

3. Use pre-approval tools and limit your number of hard checks.

4. Regularly monitor your credit history and build a strong credit profile.

By understanding and managing credit checks effectively, you can increase your chances of securing the finance you need to grow your business without taking unnecessary risks. With sensible credit activity, you’ll be well-prepared to approach lenders confidently.

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