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How to Get a First Time Small Business Loan

A business loan can help you start or grow your company, but navigating the process and lending standards can be intimidating if you don’t know how to get a business loan. Breaking it down to manageable steps — from understanding qualifications to shopping for lenders and knowing how to apply for a small-business loan — can help you secure the funding your business needs.Here’s how to get a business loan in seven simple steps.

When you’re starting a small business, lots of people will tell you that you need deep pockets. Don’t believe them! There are plenty of other ways to finance your business. One of the easiest is a first time small business loan: a small business loan with no money down! That’s right, the lender expects you to invest your own time and effort by becoming their employee — read more to find out more details on how to get a first time small business loan.

You’ve thought about it for a while, but you haven’t taken the step to actually opening your own business. Now you’re facing the reality of taking a step into the unknown without a safety net. If there is one thing that can help you make it through these sometimes stressful times it is a small business loan from the government.

Nowadays a lot of businesses starting . And people start their own business for various reasons. Now, if you are one of the those who want to start your own business and searching for how to get a first time small business loan? Or about how to get first time small business grant? Don’t worry I will help you to know that.

How much do you need?

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

1. Decide what type of loan you need to fund your business

Lenders will ask why you need a small-business loan. Your answer will likely fall into one of three categories and determine which type of business loan is right for you:

  • SBA loans or traditional term loans. These often have high borrowing maximums — SBA loans can reach $5.5 million, for example. Many lenders also offer specific products to fit a growing company’s needs, such as loans for equipment or vehicle purchases.
  • Startup financing, such as business credit cards and personal loans. These lenders require cash flow to support repayment of the loan, so companies in their first year typically can’t get business loans. Instead, you’ll have to rely on other financing.

» MORE: Compare small-business credit cards

  • business line of credit. This could make sense if you want to manage day-to-day expenses. This flexible kind of funding lets you tap into financing as needed to cover expenses such as payroll or unexpected repairs, offering a useful safety net.

2. Determine if you qualify for a business loan

Answer these questions to help determine whether you might meet the eligibility requirements to qualify for a small-business loan:

What’s your credit score?

You can get your credit report for free from each of the three major credit bureaus: Equifax, Experian and TransUnion. You can also get your credit score for free from several credit card issuers and personal finance websites, including NerdWallet.Banks prefer to offer their low-rate business loans to borrowers with credit scores above 680 at least, says Suzanne Darden, a finance specialist at the Alabama Small Business Development Center. If your credit score falls below that threshold, consider small-business loans for borrowers with bad credit or loans from a nonprofit microlender.

How long have you been in business?

You need to have been in business at least one year to qualify for most online small-business loans and at least two years to qualify for most bank loans.

Do you make enough money?

Many lenders require a minimum annual revenue, which can range anywhere from $50,000 to $250,000.If your revenue isn’t high enough, consider looking into short-term business loans, SBA microloans or even equipment financing.

3. Determine what payments you can afford

  • Look carefully at your business’s financials — especially cash flow — and evaluate how much you can afford to apply toward loan repayments each month.
  • Some online lenders require daily repayments, so make sure to factor that in.
  • To comfortably repay your loan each month, your total income should be at least 1.25 times your total expenses, including your new repayment amount, Darden says. For example, if your business’s income is $10,000 a month and you pay $7,000 in rent, payroll and other costs, you should be able to afford a $1,000 monthly loan payment. Your income ($10,000) is 1.25 times $8,000 of expenses.

4. Decide whether and how you want to collateralize the loan

  • A secured loan requires business collateral, such as property or equipment, that the lender can seize if you fail to repay the loan.
  • Putting up collateral is risky, but it can also raise the amount lenders let you borrow and get you a lower interest rate.
  • Lenders may also require a personal guarantee — even for unsecured loans. This means you’ll personally repay the loan if your business can’t, and it may let a lender come after things like your house or car in instances of nonpayment.

5. Compare small-business lenders

There are three main sources of small-business loans: online lenders, banks and nonprofit microlenders. Each typically has multiple products, but one may be better in certain instances than others.

When to get a business loan from online lenders:

  • You lack collateral.
  • You lack time in business.
  • You need funding quickly.

Online lenders provide small-business loans and lines of credit from about $1,000 to $5 million. The average annual percentage rate on these loans ranges from 6% to 99%, depending on the lender, the type and size of the loan, the length of the repayment term, the borrower’s credit history and whether collateral is required.These lenders rarely have APRs as low as what traditional banks offer, but approval rates are higher and funding is faster than with banks — as fast as 12 hours.

When to get a business loan from banks:

  • You’ve been in business at least two years.
  • You have good credit.
  • You don’t need cash fast.

Traditional bank options include term loans, lines of credit and commercial mortgages to buy properties or refinance.Through banks, the U.S. Small Business Administration provides general small-business loans with its 7(a) loan program, short-term microloans and disaster loans. The SBA provides loans up to $5.5 million, with 7(a) loans averaging $704,581 in fiscal year 2021, according to the Congressional Research Service. The average SBA microloan is $13,000.The SBA also has a 504 loan program that helps promote communities’ economic development by funding business’s fixed asset purchases — like land, buildings or equipment — through long-term, fixed-rate financing.Taking out a small-business loan from a bank can be tough due to factors like lower sales volume and cash reserves. Add bad personal credit or no collateral to that, and many small-business owners come up empty-handed.Getting funded takes longer than other options, but banks are usually the lowest-APR option.

When to get a business loan from microlenders:

  • You have bad credit or no credit history.
  • You are a new business.
  • You can’t get a traditional loan.

Microlenders are nonprofits that typically lend short-term loans of less than $50,000. The APR on these loans is typically higher than that of bank loans. The application may require a detailed business plan, financial statements and a description of what the loan will be used for, making it a lengthy process.Also, the size of the loans is, by definition, “micro.” But these loans may work well for smaller companies or startups that can’t qualify for traditional bank loans due to a limited operating history, poor personal credit or a lack of collateral.Accion Opportunity Fund, Kiva and Accompany Capital are just a few examples of microlenders.

Estimate the cost of getting a business loan

Calculate estimated payments, then see if you qualify for a business loanLoan amount$Loan term (months)Annual percentage rate (APR)1%Not sure? See estimate rates on online business loans and SBA loans.

with Fundera by Nerdwallet

6. Gather your documents

Before you apply, make sure you have all the required documentation. Locating these files now and having them easily accessible will help streamline the process of getting a small-business loan.Depending on the lender, you’ll need to submit a combination of the following:

  • Business and personal tax returns.
  • Business and personal bank statements.
  • Business financial statements.
  • Business legal documents (e.g., articles of incorporation, commercial lease, franchise agreement).
  • Business plan.

7. Apply for a business loan

You made it! Now that you’ve determined which type of loan and lender are right for you, it’s time to apply.Start by looking at two or three similar options based on loan terms and annual percentage rate, or APR. Because APR includes all loan fees in addition to the interest rate, it’s the best way to understand the total cost of a business loan for the year.» MORE: Compare small-business lendersOf the loans you qualify for, choose the one with the lowest APR (as long as you’re able to handle the loan’s regular payments), and apply with the documents you’ve gathered.Note that credit bureaus don’t differentiate between business and personal inquiries. If you use your personal credit history, your credit score could be affected when applying for a small business loan, which is why it’s important to go with your best bet.

Business loans can be essential to launching a startup or expanding an existing company, with funds often used to secure inventory, purchase equipment, rent operational space, hire employees or cover a host of other expenses. However, business loans can be difficult for new companies to get. Be aware of these eight roadblocks that can keep you from getting approved for a small business loan.

1. Poor credit history

Credit reports are one of the tools lenders use to determine a borrower’s credibility. If your credit report shows a lack of past diligence in paying back debts, you might be rejected for a loan.

Paul Steck, COO of Spread Bagelry, has worked with hundreds of small business franchisees, many of whom have bad personal credit as a result of illness, divorce or other extenuating circumstances.

“Sometimes, very good people, for reasons beyond their control, have credit issues, and unfortunately, that’s a real barrier to entry in the world of small business,” said Steck.

It is difficult to qualify for a small business loan with a credit score lower than 700. 

“A score of 720 seems to be the magic number, above which your likelihood increases dramatically and below which it decreases dramatically,” said Brian Cairns, founder of ProStrategix Consulting, which provides a host of services to startups and small businesses.

If your score is under 700, Cairns recommends you focus on fixing it if you can. Begin by checking your personal and business credit scores to ensure they are accurate. If you find any errors, correct them before beginning the loan application process. You can order a free personal credit report yearly from each of the three credit-reporting companies on AnnualCreditReport.com or individually from each credit-reporting agency – TransUnion, Equifax and Experian. To check your business credit score, contact Equifax, Experian and Dun & Bradstreet.

Additionally, you should build a strong personal credit score and drive down any debt prior to applying for a business loan.

“The better your personal finances are upfront, the more likely you are to be approved for a good loan option,” said Jared Weitz, CEO and founder of United Capital Source, a lender for small and midsize businesses.  

“Most loans require some form of down payment, and this is typically varied based upon the borrower’s financial history and the collateral put up for the loan,” Weitz added. “Based on this, most loans range from zero to 20% down payment for the loan.”  

If your credit is still far from ideal after you take these steps, consider nontraditional financing options – which tend to place less emphasis on credit scores – before giving up on getting a loan.  

“Angel investors, or individuals interesting in backing the business in exchange for a share in the eventual revenue, can be a way to help get your business off the ground,” said financial attorney Leslie Tayne of Tayne Law Group. 

Editor’s note: Looking for a small business loan? Fill out the questionnaire below to have our vendor partners contact you about your needs.

2. Limited cash flow

Cash flow – a measure of how much cash you have on hand to pay back a loan – is usually the first thing lenders look at when gauging the health of your business. Insufficient cash flow is a flaw that most lenders can’t afford to overlook. Therefore, it’s the first thing you should consider to determine if you can afford a loan.

“Really thinking through that cash flow equation is like preventative medicine for your business,” said Jay DesMarteau, head of regional commercial specialty segments for TD Bank. “You can either wait until your business gets sick, or you can do things to prevent it from getting sick.”

One of the preventative measures DesMarteau recommends is to calculate your cash flow at least quarterly. If you take that step, you may be able to optimize your cash flow before approaching potential lenders.

To figure out how large of a loan payment you can afford, divide your net operating income by your total annual debt to calculate your debt service coverage ratio. You will have a ratio of 1 if your cash flow is equal to your monthly loan payments. Though a ratio of 1 is acceptable, lenders prefer a ratio of 1.35, which demonstrates you have a buffer built into your finances.

“If you’re not sure of your current financial position or capacity, sit down with a financial planner to help you gain the perspective you need and create an action plan to address any lacking areas,” said Chad Rixse, director of financial planning and wealth advisor at Forefront Wealth Partners.   

3. Lack of a solid business plan

Having a plan and sticking to it is much more attractive than spontaneity in the finance world. It also gives you a better chance of getting a business loan.

“Lenders want to see that you have a well-thought-out plan for your business,” Tayne said. “Applying for a loan with no business plan or with a half-baked plan will not bode well.”

It isn’t uncommon for very small businesses not to have a formal business plan – or any plan at all – but you’ll still need to put in the time and work to develop a comprehensive business plan before ever walking into a lender’s office.

“If you don’t have a documented plan in place, with financial information and projections, your chances of receiving the big loan you want will dwindle,” said Weitz.

A standard business plan includes a summary of your company, market, products and financials. If you’re not sure your plan is persuasive enough to sway the lender, consider seeking the advice of a business plan expert who can review it and offer feedback.

You should also be prepared to explain how you plan to use the money you want to borrow. 

“Applicants can position themselves much better by being able to call out exactly what they need and what they need it for,” said Bernardo Martinez, the former U.S. managing director for Funding Circle, a small business loan platform.

“Instead of asking for $100,000 in working capital, if an applicant says they need $33,000 for inventory in advance of their busy season, $37,000 for new hires, $20,000 for upgrades to their store and $10,000 for advertising, we are much more confident in their ability to effectively deploy the funds,” Martinez added.

At the bare minimum, loan applicants should be prepared to explain why they want a loan and how they plan to repay it.

4. Too many loan applications

Some business owners assume they can cover all their bases by applying for multiple loans at one time. This way, they can pick and choose from a range of potential offers. However, opening too many loan applications at once can be a red flag for credit bureaus.

5. Disorganization

Before approaching potential lenders, business owners should have their act together. That means having all the paperwork necessary for your loan application on hand.

“One of the things that can be a problem when applying for a loan is if business owners don’t have the documentation that the bank will require,” Steck said. 

Obligatory documentation often includes a detailed business plan and proof of collateral; extensive financial records such as income tax returns, personal and business bank statements, loan history, and a balance sheet; and legal paperwork, such as franchise agreements, business licenses and registrations.

There are many resources that business owners can refer to when putting together their loan applications. The Small Business Administration, for example, provides a highly detailed loan application checklist for borrowers. Using these resources decreases your likelihood of coming across as disorganized or unprepared.

Careless errors will land your application in the rejected pile. “Filling out the application incorrectly or omitting information is another common mistake that can lead to your application getting denied,” Tayne said.

Tayne also pointed out that sloppy bookkeeping and inconsistent business practices, such as mixing business and personal bills together or not filing tax returns, can prevent you from getting financing. She advises taking the time to gather all the necessary information, fill out the forms completely, and read over your application before submitting.

6. Failure to seek expert advice

When you apply for a business loan, lenders want to see that you’ve sought guidance from knowledgeable advisors.

Accountants can be an important source of advice for small business owners, according to Stephen Sheinbaum, CEO of Circadian Funding, which helps small and midsize businesses obtain working capital. 

“But there are many other places to find good people to talk to, such as the Service Corps of Retired Executives (SCORE), a free mentoring service that is supported by the Small Business Administration,” he said. SCORE connects you to retired businesspeople with experience in your market. “This is important because they will know about the kind of capital that is most important to people within your industry.”

Sheinbaum also recommends that business owners get financial advice from business networking groups and conduct research on the websites of the leading alternative funders, since many have detailed resource sections for small businesses about the many kinds of available capital and the best wasys to prepare for funding.  

Other resources that provide counseling, advice and financial assistance for new businesses include the regional and local offices of Veterans Business Outreach Centers and Women’s Business Centers.

7. Failure to shop around

Finding a lender can feel so daunting that it might be tempting to sign up with the first one that comes along. But blindly pursuing one loan provider without exploring your other options is a mistake. Take the time to research a variety of traditional and alternative lenders to find the best fit for your business. 

Where to Apply?

Contact your business bank to inquire about applying for both unsecured and secured lines of credit. Your bank can inform you of the possibilities available to you. You are not required to obtain a loan from your bank and can shop around at other banks, credit unions or other financial institutions. Shopping around can ensure you are getting the best rates.

Conclusion

A need for capital to start a small business is the most common reason that an entrepreneur will ask for a small business loan. These are short-term loans that are used for any necessary expenditures such as expansion, inventory and equipment. If your start-up has no existing assets of its own, impossible to draw upon savings or is not yet earning enough income to justify a loan from a tax-credit-eligible financial institution like a bank, your best choice may be a first time small business grant from state or city government agencies.

A small business loan is a loan used by businesses to buy assets or make other business-related expenses. For example, a business can use a loan to buy real estate property, pay for marketing expenses, or expand an existing business. A small business loan can be acquired from a bank, private organization or government program. Getting a first time small business loan is easier than you think once you learn what you need to know and ask the right questions.

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