Maybe you are looking to expand your business. Perhaps you need some extra cash to get through tough times.
You will need to submit a loan application for your business in either case.
You might be anxious about this one:
What will a business loan do to my credit score?
There are horror stories of people who ruin their credit scores. Let’s take Anna as an example.
Anna needed a loan to purchase a few items for her business. Anna knew that she had good credit and started to send in applications.
Her goal was to find a lender that would offer a better deal.
She didn’t realize that every loan application had a mark on her credit score. Even though she is only shopping around, her credit report shows that she is in financial distress.
It’s now even more difficult for her to get any loan.
Could it be that you experienced the same?
This article will discuss how a business loan can affect your credit. This article explains what you should know before applying for a business loan.
Lenders Accept All Credit Scores in Account
Let’s start with the basics. When reviewing your application, lenders don’t only consider your business credit. Lenders will also look at your personal credit history.
It is important to understand the differences between personal and business credit files.
Personal credit files contain information about all loan applications that you have made. This file also contains information about any active loans or credit facilities. This file also alerts lenders about any judgments, missed payments, and other issues.
Your company’s credit file is focused on you. Other businesses may review this file to verify that you are safe to do business. It will be reviewed by lenders to assess your financial health and to ensure that you are safe to lend.
Hard and Soft Inquiries
Let’s face the main question:
What will a business loan do to my credit score?
It could. It all boils down to the lender’s type of inquiry during the application process.
The lender may use two types of inquiry: soft and hard.
Soft inquiries don’t have any impact on your credit score. They are, at best, considered a request to access your credit file. They don’t leave any black marks, so you don’t need to worry about Anna.
Soft inquiries may be conducted on your personal and business credit scores several times daily. If you request to see your credit score, a credit bureau may run this type of check.
These are the ones that you should be concerned about.
When you apply for a loan for your business, a lender will conduct hard inquiries about your credit and business credit. These are the official credit checks of a lender. These are also recorded in your credit file. This can affect your credit score.
One application will only have a small effect. However, Anna found that having too many hard credits pulls on your file can lead to damage.
Hard credit inquiries will provide more information about your past. Lenders will be able to see which loans you have had and which lenders rejected your applications in the past.
This is a good thing because lenders cannot conduct such an inquiry without your consent. These inquiries can be stopped by you have some control.
What can you do to minimize the effects of hard inquiries
You can do these things to ensure that your application does not damage your credit score.
- Do not apply for multiple loans at once. Anna was caught by surprise. This can cause lenders to have an inaccurate view of your financial viability. Even if your repayment history is impeccable, it can look like you are in financial distress. This can make you more of a risk and lead to more rejections. Each rejection is another negative mark on your credit score.
- Before you submit an application, make sure that you fully understand your lender’s requirements. Making mistakes at this stage can lead to a hard inquiry. Even though you may be rejected, this inquiry will remain on your file.
- Before applying, do everything you can to improve credit scores. Keep a track record of paying on time and clear as many debts as possible. If you are trying to improve your credit rating, it may be worth waiting a while before applying.
- Keep your company’s credit card or line of credit balances low. This will demonstrate to the lender that you use the money responsibly.
To show lenders that you are not a risk, it is important to have a good credit score for both personal and business.
Before applying, check your credit.
A business loan can harm your credit score. Applying for a business loan before you are ready can result in a rejection. This could cause your credit score to fall. Negative effects can also be caused by applying for too many business loans quickly.
It is important to do credit checks and be prepared before applying.
Unsecured Finance Australia will help you when you are ready. You can apply for unsecured business loans up to $300,000.