Does Applying for a Business Loan Affect My Credit Score?
If you're considering business finance, you may be concerned that simply making an application could affect your credit score, particularly if you want to compare several lenders before deciding which option to take.
The answer depends on what type of credit search the lender carries out and who is being searched.
A business lender may search the company, its directors or proposed guarantors. Some searches leave a footprint that other lenders can see, while others don't.
Understanding the difference between soft and hard credit searches can help you avoid making unnecessary applications that could affect your credit profile.
What happens when I apply for a business loan?
When you apply for a business loan, the lender needs to assess the risk of lending to your company.
This will typically involve reviewing information such as:
business credit history;
turnover;
recent bank conduct;
existing borrowing;
filed or management accounts;
trading history; and
the credit history of relevant directors or guarantors.
Credit reference agencies can provide lenders with information about both businesses and individuals.
However, checking credit information doesn't always have the same effect on your credit file.
What is the difference between a soft and hard credit search?
This is the most important distinction.
Soft credit search
A soft search allows a lender or other organisation to review credit information without leaving the same type of visible application footprint as a hard search.
Soft searches are commonly used for:
eligibility assessments;
quotations;
identity checks;
preliminary lending decisions; and
other background checks.
A soft search generally doesn't affect your credit score in the way a hard application search can and isn't normally visible to other lenders as a credit application.
Hard credit search
A hard search is usually associated with a formal application for credit.
It is recorded on the credit file and can normally be seen by other lenders.
One hard search isn't usually something to be particularly concerned about.
However, making numerous applications within a short period can potentially affect how subsequent lenders assess your creditworthiness.
Will a business lender search me personally?
Potentially.
If you're applying on behalf of a limited company, the lender will normally obtain credit information about the company.
Depending on its lending criteria, it may also search:
directors;
shareholders; or
proposed personal guarantors.
This is particularly common in SME lending, where the financial history of the individuals behind the business may be relevant to the lender's assessment.
The fact that the company is borrowing therefore doesn't necessarily mean your personal credit file won't be searched.
Why do lenders search directors?
A small or medium-sized company can be closely connected to the people who own and manage it.
A lender may therefore consider the credit history of directors alongside the financial position of the company.
For example, a lender may want to identify:
personal CCJs;
previous defaults;
insolvency history;
significant existing credit commitments; or
other information relevant to its assessment.
This doesn't mean a director needs a perfect personal credit history for the company to obtain finance.
The significance of any adverse credit will depend on its nature, age and severity, as well as the financial strength of the business.
Does getting a business loan quote affect my credit score?
Not necessarily.
Some lenders can provide an indicative quote or assess eligibility using information that doesn't require a hard personal credit search.
Others may require a credit search earlier in their process.
This is why it's worth understanding what type of search will be undertaken before submitting multiple applications.
If a lender can provide an indicative decision using a soft search, obtaining a quote shouldn't generally have the same impact as making a formal application involving a hard search.
Can I compare several business loan offers?
Yes, and comparing the amount, term, repayment and overall cost of different finance options is sensible.
However, there is a distinction between shopping around and submitting numerous formal credit applications.
If several lenders all conduct hard personal searches, this can create multiple application footprints over a relatively short period.
A subsequent lender may see those searches and potentially question why the applicant is seeking credit from several providers simultaneously.
Where possible, establish whether an initial eligibility check or quotation involves a hard or soft search before proceeding.
How many hard credit searches are too many?
There isn't a universal number.
Credit reference agencies and lenders use different scoring and underwriting models, and a credit search is only one part of a wider credit profile.
A handful of searches doesn't automatically mean that future credit will be declined.
However, a high number of recent applications can sometimes be interpreted as an indication that an individual or business is actively seeking substantial amounts of credit.
That can become more relevant if there are other signs of financial pressure.
Rather than focusing on a particular maximum number, it is better to avoid making unnecessary formal applications.
Does a company credit search affect my personal credit score?
A search carried out against a limited company is different from a search of an individual's personal credit file.
Limited companies have their own credit profiles.
A lender can therefore obtain business credit information without that company search itself being a personal credit application by the director.
However, the lender may separately decide to search directors or guarantors as part of the same application.
You can read more about this distinction in Does a Business Loan Affect My Personal Credit Score?
What information appears on a business credit report?
Business credit reports can contain information from several sources.
Depending on the credit reference agency and company, this may include:
company details;
filed accounts;
payment information;
County Court Judgments;
insolvency information;
credit scores or ratings;
existing credit information; and
information about directors.
Lenders may combine this information with their own underwriting criteria and other information obtained during the application.
A business credit score is therefore rarely the only factor determining whether a loan is approved.
Does a declined business loan application hurt my credit score?
The decline itself doesn't necessarily damage your credit score.
What may be recorded is the credit search associated with the application.
If that was a hard search, the search can remain visible on the relevant credit file regardless of whether the application was approved or declined.
This is another reason not to respond to a decline by immediately submitting formal applications to numerous other lenders without understanding why the original application was unsuccessful.
The problem may be something that will affect applications elsewhere as well.
What should I do if my business loan application is declined?
First, try to understand the reason.
It could relate to:
affordability;
insufficient trading history;
existing borrowing;
recent adverse credit;
declining turnover;
poor bank conduct;
sector restrictions; or
simply falling outside that particular lender's criteria.
Being declined by one lender doesn't necessarily mean another lender will reach the same conclusion.
Business lenders have different credit appetites.
However, understanding the issue before making another application can reduce the risk of accumulating unnecessary credit searches.
Does a personal guarantee affect the search?
If you're providing a personal guarantee, the lender is more likely to have an interest in your personal financial and credit position.
A personal guarantee makes the guarantor potentially liable for obligations covered by the guarantee if the company fails to repay.
The lender may therefore conduct a personal credit search before accepting someone as a guarantor.
You can read more in our guide to What Is a Personal Guarantee on a Business Loan?
How can I protect my credit profile when looking for business finance?
There are several sensible steps you can take.
Ask whether the initial search is soft or hard. Don't assume every eligibility check has the same effect.
Avoid unnecessary applications. Submitting applications indiscriminately to multiple lenders can create searches without improving your chances of obtaining appropriate finance.
Provide accurate information. A lender is more likely to need additional investigation if the information provided doesn't correspond with credit or banking data.
Understand the lender's basic criteria. There's little benefit in making a formal application to a lender whose fundamental eligibility requirements you don't meet.
Understand why you've been declined before applying elsewhere. If there is an underlying problem, another application may simply produce another decline and another search.
Is checking my own credit report harmful?
No.
Checking your own credit report doesn't normally constitute a credit application and doesn't adversely affect your credit score.
It can be sensible to review your personal credit report before applying for significant business borrowing, particularly if you expect to provide a personal guarantee.
This allows you to identify inaccurate or unexpected information and understand what a lender may see when assessing you.
What should I ask before applying for a business loan?
If you're concerned about credit searches, ask the lender:
Will you search the company?
Will you search me personally?
Is the personal search soft or hard?
At what stage is a hard search carried out?
Will all directors be searched or only guarantors?
Do you require a personal guarantee?
Understanding this before applying can help you make informed decisions about where to submit formal applications.
Applying for business finance with Adelpha Capital
Adelpha Capital provides business finance to established UK SMEs.
We consider the overall lending proposition rather than relying on a single credit score. Our assessment can include information about the business and relevant directors or guarantors, alongside turnover, cash flow, recent bank conduct, trading history and existing borrowing.
If you're looking for business finance, you can apply online or contact the Adelpha Capital team to discuss your requirements.