Being an entrepreneur is not an easy feat. Besides handling products and services, you also have to worry about managing your budget and looking at ways to grow your revenue streams.
But according to a Statista survey, 14% of all small to medium-sized companies in the US have outstanding debt between $50,000 and $100,000. Knowing how to sort out business assets and different financial processes such as credit checks will greatly impact the future of your business. So, in this article, we’ll be sharing everything you need to know about credit checks and their importance.
What is a Credit Check?
A credit check or a credit report is essentially a way to assess the creditworthiness of an individual or company. USA.gov explains that it is typically performed by a financial institution or an employer, but it can also be done by a government agency. When it comes to matters that have anything to do with making a lending decision, approving or denying a financing application, opening an account with a bank, renting an apartment, or even taking out insurance for an individual or for their property, expect a credit check to be involved.
Why Do Entrepreneurs Need to Worry About Credit Checks?
Entrepreneurs and people looking for a business loan are often required to undergo credit checks before receiving financing. CNBC highlights that 95% of companies and institutions conduct some type of financial check to job candidates or potential collaborators. This is a great way for them to guage the applicant’s ability and willingness to repay the funds, and whether or not approving financial decisions will yield good results. There are two credit check types that entrepreneurs should be aware of.
What Are Hard Credit Checks?
Upgraded Points outlines that a hard credit check is a more in-depth review of the applicant’s credit history. It is typically requested for larger loans, requires a large amount of information from the borrower, and can take up to 10 business days to process. A hard credit check will be visible on your report for up to two years, and can drop around five points from your overall score. Although the blow to your score will only last five to six months, it’s still important to pace your applications sparingly to keep it from affecting your score by too much.
What Are Soft Credit Checks?
Soft credit checks, much like hard checks, involves checking credit lines, loans, payment history, and other transactions. The main difference between the two is that unlike hard checks, soft checks do not really affect your credit score, which is why your permission isn’t necessarily required in order to run these checks. Moreover, they’re only visible on your own credit report, except of course to card, insurance, and debt-settlement companies. For instance, card issuers might want to check if you are eligible for any offers or rewards.
How Can Entrepreneurs Prepare for Credit Checks?
In Peggy Wilmm’s ‘Dear Money’, she highlights how money is a tool, and that it holds power. This is especially true for entrepreneurs who are often faced with financial challenges in the early stages of their businesses. That said, preparation is key to avoid ‘failing’ a hard check. Keep your business credit utilization ratio under 10% to improve your score, and be responsible with paying off any extra debt and bills on time. You can also look to get a yearly free credit report from any of the three main credit bureaus.
Overall, building good business credit is one of the most important tasks that entrepreneurs need to accomplish. Hopefully, we have provided some insight on how hard and soft credit checks play a part in how scores are lowered and raised.