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Key takeaways

  • To qualify for a small business loan, you typically need a good personal and business credit score, collateral and a business plan
  • Traditional banks often offer the most affordable financing but have strict requirements
  • Alternative lending options, such as SBA loans and online lenders, are available for those who don't meet bank requirements

Applying for a first-time small business loan can provide the capital needed for a business to grow and thrive. It can give you the runway to build or expand your business without tying up large amounts of business revenue. But before applying, you’ll want to have your business finances to determine funding amounts while considering the types of loans that best fit your business.

Let’s take a deeper look at how to prepare and compare first-time business loans to make the right choice.

Types of small business loans for first-time borrowers

You can choose from a host of small business loans, but first-time borrowers might find these small business loans most helpful.

Type of business loan Best for Description
Equipment loan Equipment purchases Meant to purchase necessary equipment, with loan amounts potentially in the millions.
Business line of credit Reusable credit Revolving business loan that business owners can usually draw from repeatedly as they repay past loans.
Term loan Predictable terms and payments Business loan with set terms that must be repaid within a specific period. These can have short terms from six months up to 10 years or more.
SBA microloans Disadvantaged businesses Offered on a limited basis through nonprofit microlenders. These loans offer relaxed lending criteria for loan sizes up to $50,000.
Invoice financing B2B businesses Uses a business’s unpaid invoices to prove its ability to repay, rather than relying on traditional lending requirements. Invoice factoring sells these unpaid invoices to a factoring company.
Merchant cash advance Emergency or bad credit business loans Nontraditional loan that advances money based on future business sales.

6 steps to getting a first-time business loan

Understanding the basics of getting a first-time business loan can help you make the right decision when comparing and selecting a loan. Let’s run through the steps involved.

1. Create a budget

For most business loans, lenders will ask about your business’s financial state to determine its ability to repay the loan. That means you need to properly track and document revenue and expenses, including all income streams and recurring and one-off expenses.

Many lenders will want to verify cash flow through bank statements. While not all lenders require a business-specific account, having a business checking account can help and, in some instances, may provide rewards if you’re working with the same bank. Writing a business plan can also show the lender that you’ve done your due diligence with financial projections and strategies for business growth.

2. Know how much funding you need

After crafting your business budget, you can see any cash shortfalls or upcoming purchases in which you might need a business loan. You can also get a quick financial overview to capitalize on a business opportunity or fund an emergency loan.

Knowing the exact amount that will cover the purchase and fit within your business budget will help you apply for the right amount of funding. Make sure that your business can manage the loan repayments by estimating the business loan’s cost ahead of time.

Lenders will assess your business’s debt using the debt-to-income ratio or debt service coverage ratio. Both ratios consider your business’s debt compared to revenue to gauge whether your business can handle repayments.

3. Check your credit

For a first-time small business loan, lenders will likely use your personal credit history to see a record of how you manage bills and payments. Businesses will benefit from having a strong personal credit score of 670 or higher, especially those that haven’t been in business long. Lenders may also require a personal guarantee, which is a written statement guaranteeing the loan with personal assets.

Lenders may also check your business credit score if you’ve established business credit. If you haven’t, applying for a business credit card or buying inventory on vendor credit can be good starting points.

It will also help to check your credit scores before completing an application to give you an idea of what loans you qualify for.

4. Determine what loan type may be best

Now that you know the expenses you need to cover and the funding amount, you’re set to compare business loans. Different types of business loans can serve specific purposes, and some loans tend toward stricter or more relaxed loan criteria.

For example, you can use equipment loans to purchase necessary equipment for your business. These loans tend to offer lenient lending standards because they’re secured by the equipment as collateral. Business lines of credit also tend to lessen the standard and allow businesses to borrow from the available credit multiple times.

When comparing loans, you also want to consider each loan’s features to find the right one for your business. Those include the minimum and maximum loan amounts, interest rates and fees, all of which contribute to the loan’s borrowing costs.

You should also consider the length of payment terms offered. Long terms can lower monthly payments and interest rates. Short terms can help you get out of debt quickly and lower the total interest paid. These features may steer you toward one type of loan over the other.

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Consider the total borrowing cost of each loan over the loan’s lifespan, including the total interest paid and fees. Business lenders often charge interest and fees in multiple ways, such as an origination fee, monthly payment or annual percentage rate (APR).

Alternatives to business loans

If you can’t qualify for a traditional business loan, you may want to consider these zero-debt financing options.

  • Business credit cards allow you to charge purchases within a specific credit limit. A card can help manage cash flow and expenses.
  • Business grants are like the scholarships of the business world, offering money to qualifying businesses that the business doesn’t repay. Each grant has its own qualifications, including some that want to see a business plan or presentation pitching the business.
  • Crowdfunding allows businesses to raise capital through reward or debt crowdfunding, in which a pool of individuals funds a business loan.

5. Compare lenders

Next, consider the best lenders offering the business loan you’re looking for. Lenders can vary significantly in their interest rates and loan features, even within the same loan type.

For example, some lenders specialize in short-term loans. Others are known for their prepayment discounts or low interest rates. Compare several lenders and loan offers together to see which ones best fit the purpose of your financing.

Banks

Traditional bank lenders are an obvious choice for getting a business loan, especially if you already do business banking with that lender. Traditional lenders include physical brick-and-mortar banks or credit unions.

With an established relationship, the lender may be more likely to approve financing if your business stands in a financial gray area. You can also get guidance from a loan specialist to help you decide which loan is best for you.

While traditional lenders tend to offer the lowest interest rates, most keep tight lending criteria, such as a 670 minimum credit score and two years in business. Bank lenders may also have in-depth loan applications.

Online lenders

Online lenders, also known as fintech or nonbank lenders, are available to borrowers who may not meet traditional lending requirements. These lenders may specialize in specific types of loans or serve startups or bad credit businesses.

Most of the loan application process is done online, so you can apply within minutes. Many online lenders will approve the loan in a day or two. But it may take longer to deposit the funds in your account.

SBA

If you don’t qualify for a conventional business loan, first-time borrowers could look into a loan backed by the Small Business Administration (SBA). The SBA sets standards for the SBA loan program, but loans are offered through SBA-approved lenders that do the actual financing.

SBA loans are designed to set a cap on interest rates and offer longer repayment terms than some conventional loans. The SBA 7(a) loan is the most common program applied for by small businesses. The SBA’s Lender Match tool can help find SBA-approved lenders in your area.

Microloans

Microloans are small business loans offered in small loan sizes, such as $100,000 or less. There’s not a standardized amount that defines a conventional microloan, but SBA microloans are capped at $50,000.

Because microlenders often lower the lending criteria, startups and companies with limited sales revenue may qualify for these loans. SBA microloans are offered through approved SBA microlenders, often nonprofits geared toward serving a minority community.

6. Gather the necessary information and documents

Lenders will require you to show your financial status when applying for a business loan. The exact documents will differ from lender to lender, but common requests — especially for traditional bank lenders — are:

  • Personal credit history
  • Business credit history
  • Employer Identification Number (EIN)
  • Business bank statements
  • Financial statements such as a balance sheet
  • Business income tax returns
  • Business licenses
  • Proof of business formation
  • Legal documents
  • Business plan
  • Collateral offered
  • Funding request

Bottom line

Getting a business loan can help you secure the funds needed to grow your business. But you want to research and compare different types of loans, lender requirements and loan features to make the right financing decision. You also want to keep detailed records to gauge how much funding you need and prove your creditworthiness to the lender. Consider the types of loans that will match your financing purposes and look for lenders that give you the best offer for that loan.

Frequently asked questions

  • Business loan requirements for a first-time business loan vary depending on the lender and loan type. Traditional lenders tend to want strong personal or business credit and steady revenue, while online lenders may accept fair or bad credit and low revenue. You may also need to back the loan with collateral or a personal guarantee that you’ll repay from personal assets.
  • Getting a first-time business loan can be difficult for startups because lenders often want to see strong revenue, credit history and time in business. But startup and low-revenue businesses can find business financing through alternative loans like invoice financing or merchant cash advances. They can also seek out lenders with lenient loan criteria that will accept them, although small businesses should ensure they can handle the loan payments.
  • Yes, banks do offer startup business loans, although not every bank will accept new businesses. When comparing loans, look for lenders that accept little time in business. You’ll also need to match the lender’s other requirements, like revenue and credit score. Looking for a startup SBA loan may improve your chances of approval since the Small Business Administration partially backs the loan.