Perhaps you’re gearing up to expand your business. Or maybe you need a little extra cash to help you through a tough time.
Either way, you’re going to need to lodge a business loan application.
But you might feel anxious about one question:
Will a business loan affect my credit?
You’ve heard horror stories about people destroying their credit score. Take Anna as an example:
Anna needed a loan to buy a few things for her business. She knew she had a solid credit score, so she started sending in applications.
Her intent was to find out which lender would offer a better deal.
She didn’t realise that each loan application placed a mark on her credit report. Her report now shows her as someone in financial distress, even though she’s only shopping around.
Now it’s even harder for her to secure any sort of loan.
Could the same thing happen to you?
This article looks at how a business loan may affect your credit. It tells you what you need to know before you make a business loan application.
Let’s get one thing out of the way first. Lenders don’t just consider your business credit when checking your application. They’ll also take a look at your personal credit history.
That’s why it’s important to know the differences between a personal and business credit file.
A personal credit file contains information about any loan applications you’ve made. It also offers data about any loans or credit facilities you currently have active. This file alerts lenders to any judgements, missed payments, or other issues, too.
Your business credit file focuses specifically on your company. Other businesses may check this file to ensure you’re safe to do business with. Lenders will look at it to check your business’ financial health so they can ensure you’re safe to lend to.
Let’s confront the key question:
Will a business loan affect my credit?
It may. It all comes down to the sorts of inquiries the lender runs during the application process.
The lender may use two types of inquiries – soft and hard.
The good news about soft inquiries is that they don’t cause any negative issues with your credit score. At worst, they’re noted down as a request for access to your credit file. At least they leave no black marks, which means you don’t have to worry about Anna’s situation.
In fact, your business and personal credit scores may undergo soft inquiries several times per day. For example, a credit bureau will run this type of check if you ask to see your credit score.
These are the ones you have to worry about.
A lender will run hard inquiries on both your personal and business credit files when you apply for a business loan. These are essentially the “official” version of a lender’s credit check. And they’re recorded on your credit files as such. This will affect your credit score.
A single application will have a minimal effect. But as Anna discovered, having a lot of hard credit pulls recorded on your file over a short period of time can cause damage.
A hard credit inquiry will also show more details about your history. The lender will be able to see what loans you have and which lenders have refused your applications in the past.
The good news is that lenders can’t conduct this sort of inquiry without your permission. You have a measure of control you can use to prevent these inquiries from having a major effect.
Here are a few things that will help you ensure your application doesn’t damage your personal and business credit:
- Don’t apply for several loans in a short period of time. This is the issue that caught Anna out. It can lead to lenders getting an inaccurate picture of your financial viability. Even if you have a clear track record of making repayments, too many applications can make it seem like you’re in distress. This makes you a risk, which leads to more rejections. And each rejection is another black mark on your credit score.
- Make sure you understand the lender’s exact requirements before submitting an application. Mistakes at this stage could lead to a hard inquiry without any need for it. You may get rejected because of the mistake, but that inquiry still sits on your record.
- Do whatever you can to improve your personal credit score before applying. Maintain a solid track record of on-time repayments and try to clear as many debts as possible. It may be worth holding off on your application for a few months if you need to clear up your credit rating.
- Try to maintain low balances on any company credit cards or lines of credit. This will show the lender that your business uses the money it borrows responsibly.
The idea is to present a healthy credit score, both personal and business, to show the lender you’re not a risk.
Unfortunately, a business loan could affect your personal credit score. Specifically, applying before you’re ready could lead to a refusal. That would your score to drop. Applying for too many business loans in a short period can also have negative effects.
That’s why it’s so important to check your credit and prepare properly before applying.
When you feel like you’re ready, get in touch with us at Unsecured Finance New Zealand. We offer unsecured business loans of up to $100,000 and you can apply in a matter of minutes.
Apply online today to find out if you qualify for a loan.