In general, getting a small business loan is no easy task for entrepreneurs. Between finding the right financing, going through the application process, and meeting the necessary qualifications, it’s difficult for many business owners to secure the capital they need to grow.
If you’ve never applied for a business loan before, therefore, you may be even more intimidated by the process. Luckily, we’re here to help.
In this guide, we’ll break down everything you need to know about first-time business loans. We’ll explain how to prepare ahead of time, how to choose the right loan for your business, and how to start the application process.
The Ultimate Guide to First-Time Business Loans
Many times, business owners who are applying for a loan for the first time have greater difficulty accessing funding.
So, why is it harder to get a first-time business loan?
When it comes down to it, business owners applying for a first-time business loan are likely doing so for their new business—and for small business lenders—new businesses are riskier to lend to.
This doesn’t mean, however, that it’s impossible to get first-time business owner loans. Instead, it simply means that you’ll need to be vigilant in preparing your application, finding the right product for your business, and taking the time and effort necessary to complete the process to the best of your ability.
With this in mind, one of the first things you’ll want to do is learn exactly what it takes to qualify for a small business loan for the first time—as this understanding will be essential to your preparation process.
The first step to preparing to apply for a first-time business loan is checking your credit score.
Just as a good credit score is extremely important for your personal finances, it will also have a huge impact on your business finances as well. In fact, your personal credit score will be one of the most influential factors that business lenders look at when determining whether or not you qualify for a loan.
Although your personal credit score isn’t directly reflective of your business, lenders use this measure to see how reliable you are when it comes to paying back personal debts—allowing them to infer whether or not you’ll be reliable in paying back business debts as well.
Therefore, the better your personal credit score, the more likely you are to qualify for a first-time small business loan, and one with the best rates and terms.
So, as you start preparing to apply for a business loan, you’ll want to take a look at your personal credit report, know what your credit score is, and take any necessary steps to improve your credit.
If you think you need to improve your credit score before you can apply for a first-time business loan, there are a few simple steps you can take to do so:
The next important part of preparing to apply for a first-time business loan is determining exactly how much funding you need—plus, how much funding you can actually afford.
Being able to specify why you need the funds and proving that you can afford that amount of funding will be essential to your actual business loan application. Lenders will be more likely to approve your application if you can not only display why you need the funds and how you’ll use them, but also that you can afford to pay them back.
This being said, there are a variety of reasons why you might need a first-time business loan:
You might cite any of these reasons for why you need funding, as long as you can explain specifically how much you’ll need for that purpose, and how the funds will be spent. If you’re looking to cover payroll, for example, it’s unlikely that you’ll need a $500,000 loan. On the other hand, if you’re looking to purchase real estate, this amount might make more sense.
With this in mind, as we mentioned, in addition to determining why you need business funding and how much you need, you’ll need to figure out how much capital you can realistically afford—as this is information you’ll also need to provide to lenders.
The best way to determine the debt 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—therefore, 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
You can calculate your DSCR on a monthly or an annual basis.
As an example, let’s say your cash flow (sales minus expenditures) is $2,000 per month. You project the monthly payment (including principal and interest) on your first-time small business owner loan will be $800.
Using the formula above, this means that your 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, this illustrates you won’t have the cash to pay your lender back.
Therefore, when you’re considering the loan amount you can afford to take on, you’ll want to make sure your projected loan repayments are in a range where your DSCR would stay above one.
Once you’ve checked your credit score, determine the loan amount you need, why you need it, and how much you can afford, the next part of the preparation process is gathering personal and business documents that you’ll need for your actual application.
Overall, if you’re applying for a first-time business loan, it’s likely that you’ll need to provide greater documentation to show that you’re qualified for the funds. Ultimately, the documentation and information that you’ll need will vary based on the type of business loan you’re applying for, as well as the lender you’re working with.
Generally, to qualify for a loan with the most desirable rates and terms, like a bank or SBA loan, you’ll need to meet a higher level of requirements and provide greater documentation. With online lenders, on the other hand, you’ll typically find faster application processes with more lenient requirements and less documentation.
This being said, here are some of the documents and pieces of information you should expect to gather for your first-time business loan application:
Again, although your business loan requirements will vary, when you’re applying for a first-time business loan, you can expect a few documents to be even more important.
As your business may not have the history and financials to prove your ability to pay back a loan, you’ll instead want to be able to show a strong business plan that includes financial projections, your qualifications and experience as a business owner, and solid personal financials. Additionally, you’ll likely want to consider what kind of collateral you can offer up to secure the loan.
At this point, you should have a better sense of what it takes to qualify and prepare to apply for a first-time small business loan.
The next step, therefore, is to decide what type of loan is best for your business financing needs, as well as what type of loan you can qualify for.
Overall, there are a variety of first-time business loans you might consider, but here are a few of the top options.
Best Options for First-Time Small Business Loans, Summarized
|Type of Loan||Typical Rates, Terms, and Loan Amounts||Best For|
3%-5%; 5-10 years; varies
Highly qualified business owners who need to finance a variety of purposes
Up to $5 million; 5-25 years; variable based on the prime rate
Alternative for qualified business owners who can’t access bank loans
Up to $600,000; about 1-5 years; 7%-30%
Qualified business owners who need to finance one-off expenses, but also need faster funding
Up to $250,000, 3-18 months, starting at 10%
Funding smaller financing needs for business owners who might not qualify for other products
Lines of credit
Up to $250,000; up to 2 years; 7%-25%
Flexible financing to cover more immediate capital needs
Overall, traditional bank loans are perhaps the best option for any business loan.
At the end of the day, a traditional bank (national, regional, local, or credit unions) will offer you the most affordable financing with the most desirable terms.
Generally, traditional bank loans can be either a lump sum term loan, or a business line of credit. Although the rates, terms, and amounts can vary, you’ll find that it’s unusual to see a traditional bank loan with an APR higher than 10%.
Additionally, term loans or lines of credit from banks can typically be used for any business purpose.
All of this being said, however, you have to be able to meet top requirements to qualify for a bank loan—especially as a first-time applicant.
You’ll want to have a great personal credit score, strong business financials (or at least an impressive business plan,) as well as ample collateral to qualify for a first-time business loan from a bank. If you have a few years in business and solid annual revenue, you’ll be even more likely to qualify.
A more realistic, but equally desirable option for small business owners looking for first-time business loans is SBA loans.
SBA loans are guaranteed by the Small Business Administration and issued by SBA lending partners, typically banks. With the SBA’s guarantee, however, a bank lender is much more willing to work with you.
All in all, SBA loans offer similar qualities to a bank loan—namely, low interest rates and long terms—but are slightly easier to qualify for.
Generally, you’ll still need good credit, a few years in business, and strong business financials to qualify for an SBA loan, but there are also some loan programs designed to accommodate newer businesses as well.
Both the SBA Microloan and Community Advantage program are great SBA loans for startups—as they typically don’t require as high of a credit score or as much time in business as other SBA loan programs.
If you can’t qualify for an SBA loan, or simply need financing faster, you might consider medium business term loans from online lenders.
Term loans are 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. With these first-time small business loans, you’ll receive capital and be given a set repayment schedule during which you’ll make regular and fixed loan repayments.
Overall, online lenders can offer similar loan amounts and terms to bank and SBA loans, but charge slightly higher rates (anywhere between 6% and 30%). In doing so, however, they’re able to work with less qualified borrowers than the typical bank portfolio.
Nevertheless, to qualify for a medium-term loan with the most affordable rates, you’ll still want to have a solid credit score and strong business financials (actual or projected).
You find some of the best medium-term first-time business loans from online lenders like Funding Circle and Fundation.
Short-term loans are structured exactly like other term loans, but offer lower amounts ($5,000 to $250,000), and shorter terms (three to 18 months).
A notable aspect of short-term business loans, however, is that they’re much easier to qualify for—at least compared to bank loans, SBA loans, or medium-term loans.
Short-term lenders can often approve borrowers with struggling credit scores, smaller annual revenues, and much less time in business.
In this way, short-term loans are great options for first-time business loans if you can’t qualify for other options. This being said, however, you can expect short-term loans to have higher interest rates compared to the other products we’ve discussed. Generally, the lower your qualifications, the higher the cost of borrowing will be.
If you’re interested in short-term loans, you’ll want to look into OnDeck or BlueVine.
A business line of credit is structured much differently than many other types of business loans.
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 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—this is why business lines of credit are often called revolving lines of credit.
Although, as we mentioned above, many banks offer lines of credit, these products still require top qualifications. Therefore, business lines of credit from online lenders are particularly worthwhile options for startup owners—not only because they’re easier to qualify for, but also because of their extreme flexibility as a loan product.
For the best online lines of credit, you’ll want to check out lenders like Kabbage, Fundbox, and OnDeck.
Once you’ve explored these different options for first-time business loans, the last thing to do is actually apply.
As we’ve mentioned, the specific requirements and processes you’ll need to follow will vary based on the loan product and lender you choose.
This being said, however, although it may be time-consuming to sort through the business loan application the first time, completing the process will only make getting a business loan in the future all the more simple.
Plus, if you use the funds from your first-time small business loan responsibly, you’ll not only be improving and growing your business, but also building your business’s credit history—which will also help you qualify for additional financing in the future.
This being said, once you’ve received your first-time business loan, you can follow these tips to make the most of your capital:
Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.