Understanding Credit Scores and Impact on Approval

When applying for financing, your credit score plays an important role in determining eligibility and loan terms. At FundLocal, we understand that small business owners may be concerned about how applying for funding could impact their credit score, which is why we offer no hard credit check for initial funding quotes. This allows you to explore your financing options without worrying about any negative effects on your credit.

In this guide, we’ll explain how credit scores work, how they impact loan approval, and how FundLocal uses soft credit checks to assess your business’s creditworthiness.

A credit score is a numerical representation of your creditworthiness, based on your financial history and behavior. Credit scores are used by lenders to assess how likely you are to repay borrowed funds. Scores typically range from 300 to 850, with higher scores indicating a better credit history and lower risk for the lender.

Key Factors that Affect Your Credit Score:

1. Payment History: Whether you’ve made past payments on time or missed them.

2. Credit Utilization: How much of your available credit you’re using, relative to your credit limit.

3. Length of Credit History: How long you’ve been using credit accounts.

4. Types of Credit: A mix of credit types (credit cards, loans, etc.) can positively impact your score.

5. New Credit Inquiries: Applying for new credit can affect your score, particularly if it involves a hard credit check.

When you apply for financing, lenders may perform one of two types of credit checks: a soft credit check or a hard credit check. Understanding the difference between these two types of inquiries is essential for managing your credit score.

1. Soft Credit Check (No Impact on Your Credit Score)

A soft credit check (also known as a soft inquiry) is a type of credit check that does not impact your credit score. It’s often used for pre-approvals, background checks, and in cases where lenders want to get an overview of your credit without performing a full inquiry.

• Used for Initial Quotes: At FundLocal, we use soft credit checks for initial funding quotes, so you can explore your options without worrying about your credit score being affected.

• No Negative Impact: Soft inquiries are not visible to other lenders, and they have no negative effect on your credit score.

2. Hard Credit Check (May Impact Your Credit Score)

A hard credit check (or hard inquiry) occurs when a lender performs a full review of your credit history as part of a formal loan application. Unlike a soft credit check, a hard inquiry can affect your credit score and is visible to other lenders.

• When It Happens: Hard credit checks typically occur when you apply for a mortgage, auto loan, or credit card.

• Impact on Credit: A single hard inquiry usually reduces your credit score by a few points, but multiple hard inquiries in a short time period can have a more significant impact.

At FundLocal, we aim to make the funding process as easy and transparent as possible. For that reason, we do not require a hard credit check when providing initial funding quotes. Here’s how we use credit checks throughout the financing process:

1. No Hard Credit Check for Initial Quotes

When you request a quote for a business line of credit, equipment financing, or a working capital loan, FundLocal will use a soft credit check, which has no impact on your credit score. This allows you to explore your options risk-free.

• Benefit: You can receive a no-obligation quote to see what funding you qualify for without worrying about harming your personal or business credit score.

2. Soft Credit Check for Approval

In some cases, FundLocal may perform a soft credit check as part of the final approval process. This check helps us assess your creditworthiness and financial responsibility, but it will not negatively impact your credit score.

• When It Happens: After you’ve accepted a quote and moved forward with the application process, we may conduct a soft credit inquiry to verify your credit history and ensure you meet our approval criteria.

3. Other Factors in Approval Decisions

While your credit score is one factor in the approval process, FundLocal takes a holistic view of your business’s financial health. In addition to credit checks, we review:

• Business bank statements: To assess cash flow, daily balances, and revenue consistency.

• Annual revenue: To ensure your business generates sufficient income to cover loan repayments.

• Time in business: A longer operational history suggests greater stability and lowers risk for lenders.

This broader evaluation process means that even if your credit score isn’t perfect, you can still qualify for funding based on your business’s overall financial health.

While a soft credit check won’t affect your score, your credit history can still influence the loan terms you’re offered. Here’s how:

1. Higher Credit Scores

Businesses or individuals with higher credit scores may qualify for more favorable loan terms, such as:

• Lower interest rates: A strong credit history may reduce the interest rate on the loan, lowering the overall cost of borrowing.

• Larger loan amounts: Businesses with good credit may qualify for higher loan or credit line limits, giving them more flexibility.

2. Lower Credit Scores

Businesses with lower credit scores may still qualify for financing but may face slightly different terms, such as:

• Higher interest rates: A lower credit score may result in higher interest rates, which increase the cost of borrowing.

• Smaller loan amounts: Lenders may offer lower credit limits to reduce their risk if your credit history shows some financial instability.

3. Credit Improvement Over Time

As you successfully manage and repay loans, your business’s credit score can improve, giving you access to better loan terms in the future. FundLocal encourages responsible borrowing, and timely repayment of your loan or line of credit can help boost your credit profile.

1. Will Applying for a FundLocal Loan Hurt My Credit?

• No, applying for an initial quote with FundLocal will not impact your credit score because we use a soft credit check for initial evaluations.

2. What’s the Difference Between Business and Personal Credit?

• Business credit is tied to your business’s financial history and creditworthiness, while personal credit is linked to your individual financial behavior. Both may be considered, depending on the type of financing, but FundLocal primarily focuses on business financials.

3. What Credit Score is Required to Qualify for Funding?

• FundLocal does not have a strict minimum credit score requirement. Instead, we consider a variety of factors, such as your business’s revenue, cash flow, and overall financial health.

4. How Can I Improve My Business Credit Score?

• Pay all debts on time, reduce your business’s outstanding credit balances, and maintain a healthy mix of credit accounts. Responsible financial management can help improve your credit score over time.

5. Will a Soft Credit Check Show Up on My Credit Report?

• Soft inquiries are visible only to you and do not appear on your report when viewed by other lenders. They have no impact on your credit score.

FundLocal’s soft credit check approach ensures that you can explore funding options without worrying about negative impacts on your credit score. This allows business owners to make informed decisions about financing without fear of lowering their credit profile. By taking a comprehensive look at your business’s financial health, FundLocal offers flexible financing solutions tailored to your needs.

If you have any further questions about how credit scores impact your financing options or need assistance with your application, feel free to reach out to our support team! We’re here to help you navigate the process with confidence.