First Time Business Loans: 3 Easy Steps to Success

Your guide to securing the best first time small business loan possible.
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First Time Business Loans: What You Need to Know

While securing a first time business loan may seem like an impossible task if you’ve never applied for funding in the past, it is possible with the right guidance. That’s where we come in.

To quickly get to the point, the best first time business loans are:

  1. Traditional bank loans
  2. SBA loans
  3. Medium-term loans
  4. Short-term loans
  5. Short-term lines of credit

There are a lot of great first time small business loans out there, from the options listed above to more alternative financing options like business credit cards. We break down all there is to know about securing the best first time business loan possible.

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First Time Business Loans: Where to Start

In general, getting a small business loan is no easy task for entrepreneurs.

Small business owners have a particularly hard time securing the capital they need to grow.

Banks keep their doors closed for any borrowers but those with absolutely perfect qualifications (a long time in business, a strong credit score, approaching profitability, steady annual revenue, etc.), and online lenders open their doors for a variety of different borrowers—but do so for a steep cost.

If it’s hard for any small business owner to secure a loan, it’s especially hard for new businesses looking for first time business loans.

Why New Businesses Struggle Finding First Time Business Loans

Why is it that much harder for newer businesses to find first time business loans?

Well, it comes down to the fact that new, small businesses are simply riskier to lend to.

If you’ve just opened your doors, a potential small business lender won’t have much confidence in the fact that your doors will stay open for the next one, two, or five years.

And this is backed up by fact, unfortunately: 50% of small businesses fail in their first 5 years of business.

Without time in business to prove that you can withstand the financial ups-and-downs that come with running a business, you’ll be a risky endeavor for lenders to take on. They just don’t have reason to believe that your business will be around for the long-haul to pay your loan back.

First Time Business Loans: How to Qualify in 3 Steps

Because newer small business owners are up against the odds when it comes to securing first time business loans, it’s crucial that you fully prepare for the loan search.

This includes knowing exactly what it takes to qualify for a small business loan for the first time.

So, what are lenders looking at on a first time business loan application? Here’s everything you need to do to fully prepare for applying to first time business loans.

Step One: Build Your Credit Score

Just as your credit score is incredibly important in your personal life, helping you qualify for student loans, cars, credit cards, and so on, it’s very important in your entrepreneurial life.

Yes, that all-important 3-digit number (between 300 and 850) plays a very important role in what your business qualifies for.

If it’s your personal credit score, why should it be a factor in your business’s financial life?

It all circles back to the fact that you run a smallbusiness—your personal credit score shows how reliable you are when it comes to paying your personal debts. And because your small business is probably made up of you and a few others—or maybe just you—your personal credit score will give lenders a good indication of how you responsible you’ll be with paying your business’s debts.

It’s a pretty safe assumption that someone who’s responsible with their personal credit accounts will exhibit the same behavior on their business’s credit accounts.

Your personal credit score is one of the most important factors in an application for a first time business loan. Having a good credit score (650+) will open a few different business loan options for you, but a struggling credit score will limit you.

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How to Build Your Credit Score to Qualify for First Time Business Loans

Because your personal credit score is almost always the single-most important part of qualifying for a business loan for the first time (or anytime, for that matter), you should do everything you can to craft the perfect score.

How can you build your credit score?

Well, here’s what you should be keeping in mind.

  • Pay On-Time and In-Full: Your payment history takes up 35% of the information that makes up your credit score. As such, it’s important to build a long history of making payments on-time and in-full across allyour credit accounts.
  • Keep Your Credit Utilization Low: The second-most important aspect of your credit rating is your amounts owed across all of your credit accounts. As a rule of thumb, it’s best to keep your credit utilization of all your available credit below 30%.
  • Keep Your Credit Accounts Open: Your length of credit history takes up 15% of what goes into your credit score. Your length of credit history will build naturally, but don’t hurt your score by closing one of your oldest accounts.
  • Check Your Credit Report for Errors: Along with paying your bills on time and in full every time, checking your credit report is an easy way to boost your credit. One in four consumers found errors on their credit report. It’s relatively likely that you’ll find an error on your report that’s damaging your score. Routinely monitor your credit report to be sure that you’re being correctly reported on.

Step Two: Know How Much You Need

So, you’re looking for first time business loans? To make your odds at approval as good as possible, you should know why you need the funds, and how much you really need.

It’s easy to say that you could use a cool half-a-million dollars to get things going for your business.

But without reason why you need the funds, or any thought into what your business can realistically afford, lenders won’t approve your request for first time business loans.

You could be looking for first time business loans, but actually have a fair amount of time in business under your belt. Maybe you’ve gotten by without outside capital so far, but you now came across an unforeseen business opportunity, need to finance a business expansion, or need to cover working capital gaps as your business grows. All of these are legitimate reasons for taking out business loans for your company.

However, many business owners are looking for first-time business loans because they run newer businesses, and have to finance the many costs that come with running a startup.

Any of the following could be why you’re looking for first time business loans:

  • To finance initial equipment or machinery.
  • To cover fees associated with starting a business.
  • To cover your rent payments for office space while you’re just starting up.
  • To finance initial inventory costs.
  • To cover payroll.
  • And more.
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Knowing How Much Your Business Can Afford

Knowing exactly why you need first time business loans—and clearly articulating this need to lenders—is an important step to qualifying for a loan.

But taking the time to work through how much you can realistically afford to take on debt is an even more important step.

Lenders won’t consider business loan applications that request unrealistic loan amounts for the business at hand.

And you don’t want to end up taking on a loan that you can never afford to pay back—it can have disastrous effects on your business.

So, how can you tell how much you can afford? Here’s one of the best ways to get a quick sense of what you can afford in loan repayments.

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Calculate Your Debt-Service Coverage Ratio

The best way to determine the small business loan payments your business can afford is to calculate your debt service coverage ratio, or your DSCR.

Lenders use this ratio to see how much cash you have to service your debt. This is also a number you can use to make sure you are comfortable with any potential debt payment.

Your debt service coverage is easy to calculate:

Cash Flow / Loan Payment = DSCR

This can be calculated on a monthly or an annual basis.

Here’s what it’s asking: On average, how much cash flow (sales minus expenditures) do you have coming into your business each month? Let’s say it’s $2,000. And how much do you project your monthly loan payment will be (both principal and interest)? Let’s say $800. This means you would have a debt service coverage ratio of 2.5, which is healthy!

Lenders want to see a DSCR of greater than one. If your DSCR isn’t greater than one, then where will you get the cash to pay your lender back?

When you’re considering how much loan you can afford to take on, make sure your project loan repayments are in a range where your DSCR would stay above one.

Step Three: Get Ready to Apply for First Time Business Loans

If you’re diving right into the process of finding first time business loans, you might be overwhelmed by all the information and documentation a business lender looks at when approving you.

Unfortunately, for entrepreneurs applying to first time business loans, you’ll likely put under a brighter spotlight. And to show that your business is qualified for the funds, you’ll need to offer up a lot of information about you and your business.

Technically, the amount of documentation and information you’ll need to show in a first-time loan application will depend on the type of loan you’re applying for (and we’ll get into the list of the best first-time business loans below). Some lenders will require only a few pieces of information, and some will require lots.

Here’s a comprehensive list of what you might need to prepare before you apply to first time business loans.

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Especially Important for First Time Business Loans: A Business Plan

Because you’re applying to first time business loans, and you’re likely a newer business without extensive performance records, a thorough business plan will be especially important for your application.

A business plan will show that your business is ready to take on a loan, and use it to fulfill the business’s goals.

A well-thought-out business plan explains how you plan to make money, who your customers are, what your expenses will be, where your target market is, and how you plan to deliver your goods or services to that market.

A lender will use a business plan—especially in the process of approving a first time business loan—to see if investing in your business will pay off for them.

So, what will a complete business plan look like? It should have the following:

  • Business overview and company description
  • Product and/or service description
  • Organizational overview
  • Market, industry, and competitor analysis
  • Marketing and sales strategy
  • Financial plan and projections

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Especially Important for First Time Business Loans: Collateral Documentation

Do you have valuable pieces of collateral to offer against your first time small business loan?

By collateral, we mean a valuable asset that can guarantee the loan, in a way. When lenders require collateral, they’re minimizing their risk in lending to you. If you end up not being able to make your business loan payments, they can just seize the collateral you offered against the loan to recoup most of their losses.

Collateral—like valuable equipment, machinery, vehicles, inventory, real estate, or savings accounts—might be required on the first time business loans you come across.

And if you are willing to offer collateral up on your loan, and have it properly documented so lenders understand the full value of your assets, you might have an easier time qualifying for business loans your first go-around. The lender will be more likely to work with you as collateral is essentially a way to recover money if your business fails.

Gather Important Documents

While a business plan will be a uniquely important part of applying to first time business loans, you’ll still need to gather all the necessary documentation you’d need with all business loans.

The list of the business loan requirements will vary based on what type of loan you’re applying to. An SBA loan or a bank loan, for instance, will come with a lot of different requirements to fulfill. A shorter-term loan or line of credit will have less stringent requirements, on the other hand.

If you’re searching for first time business loans, however, it’s best to be over-prepared than underprepared for the search.

So, to get fully ready to apply to your first business loan, get the following financial documents and legal information in order.

  • Business bank statements (and sometimes personal bank statements)
  • Personal and business income tax returns
  • Balance sheet and income statements
  • Business licenses
  • Articles of Incorporation
  • Resume with relevant management and business experience
  • Financial projections if you have limited time in business

First Time Business Loans: The Best Types Available

Now that you have a general sense of what it takes to qualify for first time small business loans, you might be looking to get the ball rolling and apply.

What are the best types of loans to apply to when you’re first looking for financing?

We break them down by what kind of loan you might qualify for.

First Time Business Loans for Borrowers with Good Credit

As we mentioned before, the better your credit score, the more options your business will have for financing.

That’s not to say that other aspects of your don’t matter when you’re taking out a business loan for the first time.

If you have it, your average annual revenue and time in business will also matter.

However, where your credit score stands is a good indication of what options you’ll have on the table.

If you have a strong (to perfect) credit score, these will be the best first time business loans you have available to you.

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1. Traditional Bank Loans

Traditional bank loans sit at the top of the list of the best places to find a business loan.

At the end of the day, a traditional bank (national, regional, local, or credit unions) will be your best, lowest-cost option.

Traditional bank loans are typically either a term loan or a business line of credit.

Traditional banks offer the best first time loans due to how affordable they are. You’ll almost never see a bank loan come with an APR of higher than 10%.

However, you’ll have to be a highly qualified small business owner to score a bank loan. We’re talking a near-perfect credit score, ample collateral to offer, and an air-tight business plan. Having a year or two in business and strong annual revenues will be a plus as well.

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2. SBA Loans

A more realistic but equally desirable option for small business owners looking for first time business loans are SBA loans.

SBA loans are actually bank loans. Technically, they’re business loans guaranteed by the Small Business Administration, but issued by a bank.

With the SBA’s guarantee, a bank lender is much more willing to work with you. The SBA can guarantee up to 85% of the loan being issued, which greatly minimizes the risk of lending for the bank. If you end up not being able to repay your SBA loan, the bank is guaranteed to get 85% of the loan’s value back.

All in, SBA loans offer the desirable qualities of a bank loan—namely, very low rates and long terms—but are slightly easier to qualify for.

Emphasis is on the word, “slightly,” here.

While the SBA does provide some security with the guarantee, SBA loans are still tough to qualify for. Only those with very strong credit will qualify.

If you can score one, the 7(a) loan program is a particularly great option for first time business loans.

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3. Medium-Term Loans

A small step down from bank loans and SBA loans are medium-term loans offered by online lenders.

Term loans are also just like bank loans and SBA loans: They’re lump sum loans that work particularly well for businesses that need to finance one-off expenses or opportunities. You’ll receive the capital and be given a set repayment schedule during which you’ll make regular and fixed loan repayments.

If you can’t qualify for a bank loan or an SBA Loan, your next-best option is likely a medium-term loan. Online lenders offer similar loan amounts and terms, but charge slightly higher rates (anywhere between 6% and 30%). In doing so, they’re able to work with less qualified borrowers than the typical bank portfolio. However, to get a medium-term loan with a rate on the lower-end of the spectrum, you’ll still have to have a very good credit score.

Some of the best medium-term lenders offering first time business loans online are Funding CircleLending Club, and Fundation.

First Time Business Loans for Borrowers With Bad Credit

You might be thinking… “If I don’t have stellar credit, are there no options at all for me?”

With online lenders operating in the small business financing space, these days, there are first time business loans for bad credit borrowers.

While you might have to accept a shorter-term, higher-rate loan, these following small business funding options do play an important role in opening up capital for all types of business owners looking to grow their companies.

Here are the best first time business loans for borrowers with bad credit.

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4. Short-Term Loans

These business loans are like medium-term loans, but, well, shorter.

Short-term loans are structured exactly like a term loan, but offer lower amounts ($5,000 to $250,000), and shorter terms (3 to 18 months).

A notable aspect of short-term loans is that they’re much easier to qualify for—at least compared to bank loans, SBA loans, or medium-term loans.

Short-term lenders will approve borrowers with struggling credit scores, smaller annual revenues, and much less time in business.

This makes short-term loans particularly good options for first time business loans if you don’t qualify for anything else.

The best short-term lenders for bad credit to check out are OnDeck, and The Business Backer.

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5. Short-Term Business Lines of Credit

A short-term business line of credit offers similar qualities to a short-term loan, but is structured much differently.

With a business line of credit, you’re approved for a pool of funds, which you can tap into whenever you want or need to for your business. Until you draw from your line of credit, your funds will sit there untouched. You’ll only pay interest on the amount you draw, and once you repay what you drew, your line of credit gets refilled to its original amount. (Hence why business lines of credit are often called revolving lines of credit.)

A short-term business line of credit is a particularly good option for a startup owner looking for first time business loans due in part to how flexible they are. You never know what expenses will come up when you’re first running your business, and your business’s cash flow can easily fluctuate. Having a business line of credit in your backpocket is a good way to cover expenses that come up and keep your working capital stable.

Plus, short-term lines of credit offered by lenders like Kabbage or OnDeck are great options for borrowers with bad credit as they set low qualification standards.

Ease Into First Time Business Loans With a Business Credit Card

You may not have thought about it in this way before, but a business credit card is essentially like a revolving line of credit. You’re given access to the ability to use funds up to a certain credit line, repaying those funds you borrowed at the end of every month.

If you only need access to a small amount of available capital, a business credit card could well fit your needs.

With a business credit card, you’ll be able to build your business credit history, which will strengthen your first time business loan application even more when you decide to go for it.

And if you’re able to repay your balance in full for every statement, then you won’t have to pay a bit of interest.

Even better? If you decide on a 0% introductory APR business credit cards, you can carry an interest-free balance during your first months with the card, depending on how long that intro period is.

The Blue Business® Plus Credit Card from American Express
Low Intro APR

The Blue Business® Plus Credit Card from American Express

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on American Express’s secure website
  • 12 month 0% intro APR period is one of the very few intro APR periods that applies to both purchases and balance transfers
  • 2X points for the first $50K spent
  • No annual fee
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Intro APR
on purchases and transfers for 12 months
Regular APR
Annual Fee
Minimum Credit
Rates, Fees & Further Details

The Blue Business Plus offers the longest 0% intro APR period for balance transfers and purchases on the market. With this business credit card standing in as your first time business loan, you’ll get 15 months to pay down both purchases and pre-existing debt. As long as you make your minimum monthly payments on time, this card will act like a 15-month, interest-free loan, which is a lot more affordable than any first time business loan on the market.

Be sure to note that this 15-month intro period doesn’t last forever, though—on your 16th month with the card, you APR will set in at a rate that will depend on your creditworthiness and the market Prime Rate, so be sure to check the issuer’s terms and conditions to get the latest APR information.

American Express® Blue Business Cash Card
Low Intro APR

American Express® Blue Business Cash Card

Apply now
on American Express’s secure website
  • 0% intro APR on purchases and balance transfers for 12 months.
  • 2% cash back on all eligible purchases on up to $50,000 per calendar year, then 1%.
  • No annual fee.
Learn More
Intro APR
on purchases and balance transfers for 12 months
Regular APR
Annual Fee
Minimum Credit
Rates, Fees & Further Details

The Blue Business Cash is a business credit card that offers a 12-month 0% intro APR period that applies to purchases and balance transfers.

The Blue Business Cash offers more lucrative rewards than the Blue Business Plus if you’re looking for cash back—you’ll earn 2% back on all eligible purchases on the first $50,000 each calendar year, then 1% back on all purchases after. Whereas, the Blue Business Plus will reward you in rewards points that fluctuate in value depending on how you redeem them.

With these cash back rewards, plus no annual fee, the Blue Business Cash is definitely one of your best first time business loan stand in options.

How to Graduate from First Time Business Loans

If you have a struggling credit score, or a very short time in business, you might be disappointed by the options on your table in your first go around.

You might have wished you could borrow more in first time business loans, or you may wonder why you were quoted higher interest rates than the ones being advertised.

If this happens to you, don’t be discouraged.

Many small business owners use these shorter, smaller loans (like short-term loans and short-term lines of credit) as stepping stones towards better (less expensive and longer) business loans.

You see, if you use these first time business loans responsibly, each time you make a loan payment on time, you’ll work towards building your credit score.

And using the loan to build your business, and therefore bring in more revenue, will help you qualify for better business loans in the future as well.

To graduate from shorter, smaller, and more expensive first time business loans, keep the following in mind:

  • Always make your loan repayments on time, and in full.
  • Operate within the agreements of your first time loan.
  • Use your loan for purposes that will grow your business.
  • Contact your lender to see when you’d be eligible to renew your loan at a lower rate.
  • Explore your refinancing options to see if you can take on less expensive debt.
  • Stay in business!