A Guide to First-Time Business Loans

If you’ve never applied for a small business loan before, you may be intimidated by the process. We’re here to help. In this guide, we’ll break down everything you need to know about first-time business loans.

Table of Contents

1. Get Clear on Your Funding Needs
2. Check Your Credit Score
3. Understand Your Loan Options
4. Research Lender Options
5. Check the Minimum Qualification Requirements
6. Gather Documentation for Your Loan Application
7. Apply for Your Loan
8. Receive Funding

The first step toward applying for a first-time business loan is to fully understand and feel confident in the financing you seek. 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 demonstrate why you need the funds and how you’ll use them but also that you can afford to pay them back.

There are a variety of reasons why you may need a first-time business loan, including to cover startup costs, rent payments for office space or payroll; to finance equipment, machinery or inventory costs; to pay for a business expansion; or to take advantage of a new opportunity.

You may 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 may make more sense.

Once you’ve determined why you need business funding and how much you need, you’ll need to figure out how much debt you can realistically afford—as this is information you’ll also need to provide to lenders.

Just as a good credit score is extremely important for your personal finances, it will also have a huge impact on your business finances. In fact, for many loan types, 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.

Business Credit vs. Personal Credit

Your business credit score will also become increasingly important and relevant as your business becomes more established. A strong one will help you qualify for, among other things, larger loans with more desirable rates and terms.

But if you’re seeking a first-time business loan, chances are your business is still in its startup phase, which means you’re likely still establishing business credit. Lenders will rely on your personal credit score, then, when determining your eligibility for financing.

Understand Your Personal Credit Score

Different loan opportunities will be available to you depending on your personal credit score. Typically, the ranges and options break down this way:

• 700 or above: You’ll meet the minimum credit requirement for nearly any type of business funding, including bank loans and SBA loans.
• 650 to 700: You’ll still have a decent amount of loan options open to you. And if you’re able to establish some business history and your business finances are in good shape, you may even be able to qualify for an SBA loan.
• 600 to 650: Your options will become more limited. But again, with a few months of business history and strong financials, you may be able to qualify for a loan from an alternative lender.
• 550 to 600: Your loan options will certainly be limited. Loans you qualify for will most likely have short terms and will require security in the form of collateral, a personal guarantee and/or a UCC lien. 
• Below 550: It will be very difficult for you to secure a loan, but you can take active steps to improve your personal credit score.

»If you have a poor or “bad” credit score, or if you otherwise are hoping to get a first-time business loan without a credit check, take a look at your options for startup loans with no credit check.

The next step is to decide what type of loan is best for your business financing needs. There are a variety of first-time business loans you might consider, but here are several of the most common types of small business loans.

Loan Type	Description	Typical Terms and Amounts
Term Loan	Upfront cash with set repayment terms and lower interest rates than other loan types. Term loans are offered on short, medium and long terms.	1 to 7 years; up to $5 million
SBA Loan	Various loan types that are partially guaranteed by the Small Business Administration. This loan type involves stringent qualification standards in exchange for highly favorable rates and terms.	5 to 25 years; up to $5 million
Business Line of Credit	Flexible financing to cover more immediate capital needs. Make withdrawals from the line and pay interest only on the portion you’ve withdrawn. As you pay it off, the available amount of credit regenerates.	Up to 2 years; up to $250,000
Microloan	Small loans primarily intended for underserved business communities and startups. Qualification requirements are typically easier to meet, but interest rates tend to be higher.	Up to 7 years; up to $50,000
Equipment Loan	Funding to purchase equipment or machinery, which you own once the loan is paid off. The equipment secures the loan, so qualification requirements tend to be more flexible.	3 to 10 years; up to $1 million

Term Loans

Business term loans are 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 payments, often with a fixed interest rate. Term loans are typically classified based on their term lengths: short (up to 12 months), medium (up to five years) and long (more than five years).

Short-term loans are generally the easiest of the three to qualify for. Lenders may be more inclined to approve borrowers with lower credit scores, smaller annual revenues and less time in business. The tradeoff, however, will be higher interest rates on loans that need to be repaid in shorter timeframes. Generally, the lower your qualifications, the higher the cost of borrowing will be.

Medium and long-term loans become more difficult to qualify for, but in exchange, they’ll give you a larger sum of money and more time to repay the loan.

SBA Loans

Another option for small business owners looking for a first-time business loan is an SBA loan. These loans are guaranteed by the Small Business Administration and issued by SBA lending partners, typically banks. With the SBA’s guarantee, a bank lender is much more willing to work with you.

SBA loans, which include several loan types under this umbrella category, typically offer low interest rates and long terms and can be a bit easier to qualify for than a loan from a bank. 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 some loan programs designed to accommodate newer businesses as well.

Business Lines of Credit

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.

Microloans

Microloans are essentially term loans issued in smaller amounts (typically maxing out at $50,000) and generally targeted at startups and businesses from traditionally underserved communities, such as those owned by minorities, women and veterans.

Because of the kinds of businesses they’re designed to serve, and since they are often issued by alternative and nonprofit lenders, qualification requirements tend to be more accessible. Microloans do, however, come with higher interest rates than some other loan types.

Equipment Loans

Equipment loans, or equipment financing, help small businesses make business-essential large purchases such as equipment, machinery and technology. Similar to a term loan, you receive a lump sum to make the equipment purchase, and then pay the loan off—plus interest—over a set term.

A key benefit of an equipment loan is that you own the equipment once it’s paid off. Equipment financing companies also tend to have more flexible eligibility requirements because the equipment purchase serves as collateral in the event you default on your loan.

Different lenders offer different types of loans, and each comes with their own set of benefits and drawbacks.

Lender Type	Loan Types	Pros	Cons
Bank	Term loans; business lines of credit; SBA loans; equipment loans	-May offer longer terms -More competitive interest rates	-Often requires an existing relationship (active accounts) with the bank -Stricter eligibility requirements
SBA	Microloans; disaster loans; working capital loans; business lines of credit	-Lowest interest rates available -Longer terms -Larger loan amounts	-Stricter eligibility requirements -Slower funding speeds -Personal guarantee and/or collateral required
Alternative/Online Lender	Term loans; business lines of credit; equipment loans	-Flexible eligibility requirements -Faster approvals -Faster funding speeds	-Higher interest rates -Shorter terms
Microlender	Microloans	-Flexible eligibility requirements -Good option for startups and other businesses that typically struggle to find funding	-Small loan amounts -Slower funding speeds -May be limited to local lenders

Now it’s time to determine the loan type that best fits your business needs, and research the lenders that offer that type of loan. Many lenders list their minimum business loan requirements on their website—namely credit score, time in business and annual revenue.

You’ll want to be sure you meet the minimum qualification requirements for the loans you plan to apply for. These requirements will vary depending on the type of loan you’re applying for and which kind of lender is funding the loan.

You’re almost ready to apply for your first-time business loan. Before you do, it’s wise to gather all of the personal and business documents that you’ll need for your application.

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. 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 flexible requirements and less documentation.

Generally, these are the documents and information you should expect to gather for your first-time business loan application:

• Driver’s license or other valid ID
• Business plan for funding
• Statement of purpose for the loan
• Business bank statements (and sometimes personal bank statements)
• Personal and business tax returns
• Personal credit score (and sometimes business credit score)
• Balance sheet, profit and loss statements, and other business financial documents
• Business licenses, permits, contracts, and other legal documents
• Resume with relevant management and business experience
• Proof of collateral

Before you apply for your small business loan, it’s a good idea to have someone review your application. Local professional resources may be available through the SBA. 

Some lenders will accept loan applications online. Alternative and online lenders, in particular, will accept applications online. More traditional lenders such as banks and credit unions vary in their requirements for whether a loan application may be submitted online or needs to be submitted in person or over the phone.

Once your first-time business loan application has been accepted and you receive an offer, it’s important to carefully review your loan agreement before signing it. Be sure to ask any questions you have and feel confident in your understanding of payment amounts, due dates and term lengths.

When the lender receives your signed loan agreement, it will release your funds. Funding speeds vary based on your lender and loan type. Alternative lenders can typically deposit funds into your account within a few days. For traditional bank and SBA loans, it can take up to a few weeks (or longer) to receive your funds.

Once You Receive Your First-Time Business Loan

After you receive your first-time business loan, follow these tips to make the most of your capital:

• 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’re eligible to renew your loan at a lower rate.
• Explore your refinancing options to see if you can take on less expensive debt.