Soft and hard credit checks: the difference for business borrowers

A soft credit check, sometimes called a soft search, is a look at your credit information that is not part of a formal application for credit. Lenders and brokers use it to see whether you are likely to be eligible before you commit to anything.

Capzy’s own funding check uses a soft search, which does not affect your credit score. The exact wording a lender uses for this kind of search varies, so it is worth asking what is meant when you are offered one.

A hard credit check is a search a lender makes when you apply for credit, and it is recorded on your credit file. It lets the lender see your payment history and other details so it can decide whether to offer you finance.

The Information Commissioner’s Office says searches on a credit file should not have a negative impact on your credit history. The difficulty is volume: lots of searches in a short space of time can imply you are having problems getting credit, and that can itself affect a lender’s decision.

The main difference is purpose: a soft check is an enquiry before you apply, and a hard check is part of the application. Soft and hard are industry terms rather than legal definitions, so the detail can differ from one lender or agency to another.

The practical test is simple. If you are asked to sign an application, or told a decision will follow, expect a hard search. If you are only asking what might be available, a soft search is the likelier route. Either way, you are entitled to know which one is being run before you agree.

Multiple applications matter because each hard search is a record that you asked for credit. The British Business Bank advises that making lots of applications for credit could negatively affect your score and your ability to access finance.

A run of declined applications therefore makes the next one harder. That is the reason to find out whether you fit a lender’s criteria before you apply, rather than applying to many lenders one after another and hoping one says yes.

They can. A lender may search the company’s record and, depending on the product, the personal file of a director, a partner or a sole trader. The British Business Bank says that for small companies with little credit history, lenders may consider the owner’s personal credit score.

Where a director gives a personal guarantee, the lender will usually want to look at that person’s own finances too. Our guide to the business credit score explains how company and personal records differ.

Most lenders will carry out a full credit check at some point before they offer finance, even where an early step uses a soft search. The British Business Bank notes that even leasing and hire purchase, which suit many equipment purchases, still require a credit check.

• Early eligibility tools often use a soft search, so you can see options without a formal application.
• A formal application normally brings a hard search, and the lender may add its own checks on your accounts, bank data or identity.
• A lender can search your file only with a lawful basis and after telling you it will do so.

On that last point the ICO says data protection law does not require a lender to have your consent before it searches, as long as it has a lawful basis and you have been told the search will take place. You will normally find this in the application terms, so read them before you sign.

You limit searches by checking your fit first and applying only where you meet the lender’s criteria. A few steps help:

1. Check eligibility with a soft search before any formal application.
2. Read the lender’s published criteria, such as trading history and the product’s purpose.
3. Apply to one lender at a time, and wait for the answer before you try another.
4. Look at your own credit file first and correct any errors.
5. Leave a gap after a decline and fix the reason before you apply again.

Our guide to why business loans get declined covers the common reasons, and business loan requirements sets out what lenders usually ask for.

Yes, a soft check is usually the first step, and a hard check follows if you choose to go ahead with a formal application. The soft stage is where you find out whether it is worth applying; the hard stage is where the lender makes its decision.

That order is why a soft search is useful. It lets you compare what may be available, and drop options that do not suit you, before any search is recorded against your file as an application. Nothing about a soft search obliges you to proceed, and you should be told clearly when the next step will involve a hard search.

• Read the screen or email that asks for your permission to search, and note whether it says hard or soft.
• Do not sign a full application until you have compared the terms of an offer, not only the headline figure.
• Keep a note of who has searched your file and when, so you can explain any pattern to a lender if asked.

Yes. You can ask the credit reference agencies for a copy of the information they hold on you. The ICO says individuals can request their file free of charge, and to look for the phrase ‘statutory report’ on an agency’s website to avoid a paid subscription.

If you spot an error, tell the agency that supplied the file, and it should carry out further checks and put it right. A company’s report is a separate record from your personal one, and the agencies’ business reports are explained in our guide to the business credit score linked above.

Capzy is a credit broker, not a lender, and is paid by the lender. Our check is a soft search, so you can see what might be available without it affecting your credit score, and we introduce you to lenders that look like a fit.

A full application to a lender may involve a hard search, and each lender makes its own decision, subject to status and lender criteria. You can see the kinds of provider in our lender directory. Capzy does not give legal or financial advice, so speak to an adviser if you are unsure how a search could affect you.