Hard vs soft credit check

Looking at a credit report and trying to decipher what exactly is on the report can be confusing, especially if it is the first time you’ve received a report as a business owner. There can be a sense of apprehension, along with a lot of technical jargon that you may need to get your head around. Not to mention, you may have heard that the difference between hard vs soft credit checks is the amount of ‘damage’ done to your credit score. 

Here, we’ll go through the difference between soft credit checks vs hard credit checks so that you know how your business credit score will be affected, depending on the type of check you choose. When you are looking to scale your business, purchase equipment, or secure some credit, it is important to know how the different inquiries work. This will allow you to move forward in confidence. 

What is a credit inquiry?

Firstly, let’s take a closer look at what exactly a credit inquiry is. A credit inquiry takes place when a lender requests to see your business credit profile from a credit reference agency. So, the difference between soft credit checks vs hard credit checks will be the intent of the credit check and the permission needed to conduct one. 

Soft credit check

A soft credit check takes place when the decision to lend money is not necessarily considered ‘high stakes’. These types of credit checks will not affect your credit score. Examples of soft credit checks include: 

  • Checking your own business credit score: You’re able to check your business credit score as often as you feel the need to. 
  • Pre-approved offers: When you have been pre-approved for a business credit card, the credit card company has already done a soft credit check on your business to see whether or not it is eligible. 
  • Background checks: Your business may also need to undergo a background check to verify financial responsibility. 

Hard credit check

On the flip side, hard credit checks take place when you have applied for credit for your business, and a lender views your business credit report to make a decision as to whether or not they will lend your business the money. This will then trigger the credit referencing agencies. 

Typically, a single hard credit check will shave off 5-10 points from your business credit score. The enquiry may stay on your credit report for 2 years, but your actual credit score is only affected for the first 12 months. 

Hard vs soft credit check 

There are a few differences between a hard and a soft credit check, for example: 

Feature

Soft Credit Check

Hard Credit Check

Impact on score

None

Temporary decrease (typically 5–10 points)

Visible to lenders?

No

Yes

Your permission?

Not always required

Almost always requires a signature or consent

Typical purpose

Identity verification, pre-approvals

Mortgage, auto loan, business line of credit

Frequency risk

None

High frequency can signal "credit hunger."

 

When comparing hard vs soft credit checks, it is important to keep in mind visibility. Your potential lenders can’t see how many soft credit checks you’ve had, but they can see every hard credit check your business may have been subject to. So, if a lender sees that you’ve had 5 hard credit checks conducted in a month, they may perceive this as your business being desperate for money and that you’ll take on more debt than you can handle. 

Why business owners should care

As a business owner, you need to understand that your business credit score is your business’s reputation on paper. So, when you’re looking to scale your business, your business credit score will determine the interest rates that you will need to pay. A difference of just 20 points can result in thousands of pounds in extra interest over the course of a commercial loan. It is safe to say that if you don’t understand the ins and outs of a hard vs soft credit check, you may harm your business credit score before needing it most. 

Managing major business purchases

As a business owner, you’ll be planning for the future of your business, and you’ll need a strategy to handle either soft credit checks vs hard credit checks. Here’s how to do this: 

Lead with the soft approach

Make sure the lender offers a pre-qualification process before filling out a formal application for business credit. Many lenders now offer soft vs hard credit check initial screening, which will allow you to take a look at potential rates and terms of conditions without having to commit to a score-damaging hard credit check. 

Window shop for rates

Most lenders will understand that if you’re looking for a specific type of business loan, you may conduct more than one inquiry for that specific type of business loan. A tip here is to consolidate your loan applications into a two-week period so that lenders understand this. 

Monitor your business credit regularly

When you check your own business credit score, this is considered a soft credit check. This means that you should be regularly keeping on top of your business credit score. There are various tools you can use to keep track of this. Also, it is important to note that if you see an unauthorised hard credit check, you should dispute this immediately. 

Space out different credit types

Rate shopping will work for the same type of loan; however, it does not work for different types of loans. So, if you decide to apply for a business credit card, a line of credit, and a term loan at the same time, they will be recorded as three separate hard inquiries. The best thing to do is to space these out by at least 6 months in order to allow your business credit score to recover. 

The goal of understanding the difference between a hard vs soft credit check is to be fully aware of the pros and cons so that you can make an informed decision when looking to loan money for your business. Being able to grow your business means that you need capital, but without inquiring, you cannot get it. 

The best way to go about using either hard vs soft credit checks is to ensure that you use soft credit checks for research, bundling hard credit checks for actually applying for the loan. This way, you begin to protect your business’s most important asset, which is creditworthiness. 


Are you looking to purchase business credit checks? Get in touch with Creditserve for more information today.