It is one of the first questions a business owner asks before applying for equipment financing: will this hurt my credit? The short answer is that it depends on the kind of credit check, and the difference between the two kinds is bigger than most people think.
This post explains soft and hard credit pulls, what each one does to your score, how equipment lenders use them, and the questions to ask before you apply anywhere.
Two kinds of credit checks
When someone looks at your credit report, the credit bureau records it as an inquiry. There are two kinds.
Soft inquiries
A soft inquiry, or soft pull, happens when your credit is checked for a reason that is not a new application for credit. Common examples:
- Checking your own credit report or score
- Prequalification and pre-approval checks
- Account reviews by a lender you already do business with
- Some employment and insurance screenings
A soft inquiry does not affect your credit score. It appears only on the copy of the report you see yourself. Other lenders cannot see it, and scoring models ignore it.
Hard inquiries
A hard inquiry, or hard pull, happens when you apply for credit and the lender checks your report to make a lending decision. Mortgages, auto loans, credit cards and many business loans all involve one at some point.
A hard inquiry can lower your score, but usually not by much. According to FICO, one additional inquiry takes fewer than five points off a FICO score for most people. The effect also fades:
- Hard inquiries count toward FICO scores for 12 months.
- They stay visible on your credit report for two years, then drop off.
A single hard inquiry is rarely a problem. Several in a short period can be, because to a lender a run of applications can look like a business under financial pressure.
The rate-shopping myth
You may have heard that several credit checks in a short window count as one. That is true for some kinds of credit. Scoring models group inquiries for mortgages, auto loans and student loans made within a short shopping period, so you can compare lenders without being penalized for each one.
Business and equipment financing is generally not treated that way. If you apply with five equipment lenders in a week and each one does a hard pull, each inquiry can count on its own. Shopping around is still smart. Just know how each lender checks credit before you hand over your information.
Personal credit, business credit, or both
Equipment financing involves two kinds of credit, and a lender may look at either or both.
Personal credit is your own history with Equifax, Experian and TransUnion. Most equipment finance companies look at the personal credit of the business owners, especially for smaller and newer businesses. Owners usually sign a personal guarantee, so their personal credit is part of the decision.
Business credit is your company’s file with commercial bureaus such as Dun & Bradstreet, Experian Business and Equifax Business. These reports track how your business pays its suppliers and lenders. Inquiries on a business report are handled separately from your personal score.
For an established business with strong financials, the business file may carry more weight. For a startup or a business without much commercial history, the owner’s personal credit usually does most of the work.
How credit checks work at American Capital Group
We use a soft credit pull, which won’t affect your credit score. Here is exactly when it happens in our online application:
- Step 1 checks nothing. It saves your business details and what you want to finance, so we can follow up if you stop partway. No credit is pulled.
- Step 2 is where the soft pull happens. You enter the owner details and authorization there, and the soft pull runs only when you submit that step. The page says so right next to the submit button, so it never happens by surprise.
Because it is a soft pull, other lenders cannot see it and it does not count against your score, whatever the outcome of the application.
Getting a quote is free, with no obligation and no hard credit pull. If you would rather talk it through first, call us and we will explain what we check and why before you apply.
Questions to ask any lender before you apply
Whoever you apply with, these questions tell you what to expect:
- Is your first check a soft pull or a hard pull?
- If there is a hard pull, when does it happen? Before you see an offer, or only after you agree to move forward?
- Whose credit do you check? Just the business, or every owner above a certain percentage?
- Which bureau do you use? If you have frozen your credit, you will need to lift the freeze at that bureau first.
- Do you report the account to business credit bureaus? Paying an equipment loan on time can help build your company’s credit file, but only if the lender reports it.
A lender that answers these clearly is usually one that will be clear about the rest of the deal.
How to protect your credit while you shop
- Check your own reports first. You can get free reports from all three bureaus at AnnualCreditReport.com. Checking your own credit is a soft inquiry and never affects your score.
- Fix errors before you apply. An account that is not yours, or a late payment that was not late, is worth disputing before a lender sees it.
- Get quotes before full applications. A quote request often needs less information and may involve no credit check at all.
- Apply where you are likely to be approved. A few targeted applications are better than many scattered ones.
- Space out other credit. If you are about to finance equipment, it is a good time to hold off on new credit cards or other loans.
What lenders look at besides your score
Your credit score is one input, not the whole decision. Equipment lenders also weigh things a score cannot show:
- Time in business. A company with a few years of history gives a lender more to go on than one that opened last month, although there are programs built for startups.
- The equipment itself. Equipment that holds its value, such as construction machinery, trucks or medical devices, gives the lender collateral, which can make an approval easier than an unsecured loan would be.
- Cash flow. Bank statements show whether the business can comfortably carry the new payment alongside what it already pays.
- Payment history on similar debt. A record of paying equipment loans or leases on time often matters more than a single number.
- The size of the request. Smaller deals can often be approved on an application alone, while larger ones may call for financial statements or tax returns.
A credit check tells a lender how you have handled credit. These other factors tell it whether this particular deal makes sense. That is why a business with less-than-perfect credit can still be approved, and why it helps to explain anything unusual on your report up front.
The bottom line
Applying for equipment financing does not have to hurt your credit. A soft pull has no effect on your score at all, and a hard inquiry usually costs a few points for a few months. What matters most is knowing which kind of check a lender uses and when, so that you choose when a hard inquiry happens instead of finding out afterward.
If you have a question about how a credit check would work for your business, request a free quote or call us before you apply. We will walk you through it.
Sources
- myFICO, Credit Checks: What Are Credit Inquiries and How Do They Affect Your FICO Score?
- Consumer Financial Protection Bureau, What is a credit inquiry?
This post is general information, not credit or legal advice.
Frequently asked questions
Does a soft credit pull affect my credit score?
No. A soft inquiry is visible only to you on your own credit report. Lenders cannot see it, and it is not used in calculating your credit score.
How much does a hard inquiry lower a credit score?
Usually only a little. FICO says that for most people one additional inquiry takes fewer than five points off a FICO score. Inquiries only count toward FICO scores for 12 months, and they drop off your credit report after two years.
Does American Capital Group do a hard pull when I apply?
American Capital Group uses a soft credit pull, which won't affect your credit score. The first step of the online application only saves your business and equipment details and does not check credit at all. The soft pull runs when you submit the second step.
Will my personal credit be checked for a business equipment loan?
Often, yes. Most equipment finance companies look at the personal credit of the owners, especially for smaller or younger businesses, because an owner usually signs a personal guarantee. Many also check business credit reports.
Do several applications in a short time count as one inquiry?
Not reliably. Credit scoring models group shopping-related inquiries for mortgages, auto loans and student loans, but business and equipment financing inquiries are generally not grouped that way. Each hard inquiry can count separately, which is why it pays to ask how a lender checks credit before you apply.