How do I get my first business loan?

Figure out how much money you’ll need, which kind of loan you need and how to qualify for it, and what documents you’ll need for the application.

Banks can often offer the lowest-cost financing, but their qualification requirements can be demanding.

The U.S. Small Business Administration (SBA) and online lenders also might be options for people who don’t meet the bank criteria.

Loans to start a business can help new businesses grow and thrive. In fact, about 16.5% of small businesses use loans from a bank or other financial institution to start up and run. Applying for a business loan can help cover startup costs for a new venture, or help an existing business grow and expand.

Especially for new business owners, financing can be difficult, and the key is preparation. Make sure to find the best match for your business needs in terms of both types of loans and loan requirements.

How much can you afford? How’s your credit? What types of loans are there? How do you compare lenders? What documents do you need? How do you apply?

Knowing How Much You’ll Need to Borrow

Before applying for a loan, you’ll need to make a budget and plan. If you’re starting a new business, this may include outlining your costs. If you’re trying to get a loan for an existing business, you’ll also have to think about expenses you’re trying to cover and ways to pay it off. Most lenders will review your finances when deciding whether or not you can pay off the loan. Write down a list of everything that shows where money comes from and goes.

Depending on your lender, they might check bank statements to confirm your cash flow and financial situation. Getting a separate business checking account can help the approval process, though it’s not required for all lenders. Having an account at the bank that is lending to you can be helpful for approval, in some cases.

Some lenders will ask startups or first-time business owners for a business plan. The plan lays out financial projections for a year or more, as well as steps to achieve those goals. It shows the lender you’ve taken steps to make sure it’ll be profitable. Not every lender will ask for it, but it’s one way to show it off.

Once your budget is set, you’ll have to consider what things you want to pay for with the loan, and then see how much you can afford to pay back. Having an exact amount can help you apply for and get the right loan.

You will need to consider how much it will cost to pay back the loan.

Lenders look at debt-to-income ratio (DTI) or debt service coverage ratio (DSCR) to see whether you’re bringing in enough money to be able to pay the loan back. Both show your debt compared to your revenue.

To get the most accurate estimate of how much money you’ll be borrowing, add up the total cost of borrowing. This includes all interest and fees you’ll be paying over the life of the loan. Lenders may charge different kinds of fees to borrowers, like an origination fee or service fee. These are other costs you need to account for.

Many lenders will also check your personal credit to see how responsible you have been with other debts. When you apply for a small business loan, make sure you have a good credit score - a 670 or higher usually helps. Lenders may ask for a personal guarantee, where you put your personal assets on the line for the loan.

In addition to your personal credit score, some lenders will also review your business credit profile and score. Getting a business credit card or making purchases on vendor credit are good ways to start building business credit.

Before you apply, see what your credit scores are. You can aim for loans you can qualify for and increase your chances of getting approved. Many lenders list the minimum score they’re looking for on their websites.

Loan Products

Some loans have more lenient requirements and can fit your needs better than others. Here are some of the most common ones:

• Equipment loans cover the cost of the equipment you need. Amounts can run into the millions.
• A business line of credit is revolving, so you can use it repeatedly once you’ve paid off what you took.
• A term loan is money you pay back over a set period. Terms can run from six months to a decade or more.
• Microloans are only available on a limited basis by nonprofit microlenders. While criteria are relaxed, amounts are $50,000 or less.
• Invoice financing is a way to use unpaid invoices in place of other lending criteria to show you can pay back a loan. Factoring is when a factoring company buys your invoices and collects from customers on your behalf.

Lenders set ranges of how much money you can borrow. It’s important to find lenders who can offer you the amount you need. To see what borrowing will cost you, check the rates and fees.

The amount of time you’re willing to stay in debt is also important. A longer-term loan could mean a lower monthly payment, which could make a loan seem more affordable, and in some cases mean lower rates. Shorter-term loans could mean you pay less in interest over the long run. Think about how much time you want to spend paying back a loan and what you feel comfortable with.

Although it is rare, some lenders offer a discount on rates for certain consumers. Bank of America offers a rate discount of between 0.25 to 0.75 percent off rates for those who qualify for its Preferred Rewards for Business program.

If your “combined daily average balance” is at least $20,000 over three months, you can qualify for the Gold tier. The more you have in your accounts, the bigger the discount on the interest rate you pay.

It’s worth knowing that nearly all kinds of loans are open to first-time borrowers, but you might consider a business line of credit. Here’s why.

Lines of credit may be easier for new business owners to qualify for. Lines of credit may accept owners with a shorter operating history or lower credit score than other loans.

If you aren’t sure how much you will need or want to borrow, a line of credit may be a good fit. You’re approved for a set amount of money. You can take any amount up to the limit anytime during the draw period.

You pay interest only on what you use. This means you won’t pay interest on money you haven’t drawn down.

Some lines of credit, such as Wells Fargo’s Small Business Advantage line of credit, target first-time owners. Some lines of credit come with rewards programs that let you earn points for your spending you can redeem for travel, gift cards or statement credits.

If you don’t qualify for a business loan, there are other financing options for your business.

Business credit cards let you charge purchases up to your credit limit any time. These cards can help manage cash flow and track expenses.

A business grant is like a scholarship for businesses. It’s money you don’t have to pay back. Each grant comes with its own qualifications. For example, a grant may want a business plan or presentation to go with the application.

Crowdfunding is when a group of people contribute money to support a venture. They donate or receive a return for their investment. Some crowdfunding campaigns work like a business loan.

Now that you know what you need, the rest is finding the right place to get it. Lenders offer loans of varying sizes, terms, interest rates and approval requirements.

Each lender has a specialty. Some will be happy to give you a short-term loan, while others offer a discount on your rate if you pay early. Others have lower interest rates than other lenders. It’s a good idea to compare a few offers side by side.

Banks sometimes offer the most competitive loan rates. Major lenders and credit unions offer a variety of loan products. You can apply for a small business loan in person. Having a loan specialist walk you through the process may be a positive.

However, bank standards are strict. Banks commonly require a personal credit score of 670 or higher. This depends on the lender and the type of loan you are applying for.

Business loan applications are often detailed and ask for a lot of documentation. Obtaining bank financing may be hard for first-time owners whose financials don’t meet bank standards.

Online lenders, also called fintech or nonbank lenders, are an option if you don’t meet bank qualifications. Startups or small businesses with a short operating history might have a better chance of approval with an online lender.

Applying online is quick - minutes. In some cases, it can take just a day or two to be approved for a loan - though it may take longer for the money to show up in your bank account.

An SBA loan might be an option if you’re turned down by other lenders. Lenders have to be SBA-approved - often big banks. They make the loan and the SBA guarantees a portion of the loan. The SBA promise means less risk for the lender.

The SBA caps interest rates. These loans can come with competitive interest rates. They also come with a relatively long repayment schedule, making the monthly payments affordable.

You can use SBA’s Lender Match tool to find SBA-approved lenders to apply for an SBA loan. In 2024, 15.5 percent of SBA loans went to startups and another 16.7 percent to businesses under two years old.

Microloans are, well, micro. There’s no standard definition of a microloan. But the SBA microloan program caps them at $50,000.

Microlenders typically have loosened up their requirements to help startups and small businesses with little revenue qualify. SBA microlenders are SBA-approved intermediaries, which are often nonprofit lenders that focus on minorities.

The Application Process

Documents needed for a business loan may vary by lender. Here is some of the information you’ll need to apply:

• Personal and business credit reports.
• Tax returns for both you and the business.
• Bank statements.
• Legal documents, including business licenses.
• Business plan.
• If you’re using something as collateral, you may have to give information on the asset and its worth.
• Your employer identification number (EIN).
• Financials, including profit and loss statements, cash flow statements or balance sheets.
• Have an idea of how much money you want to borrow before going into the application.
• Personal financial statements, if you lack business ones.
• A government issued ID.
• Legal documents showing business ownership.

Once you’ve decided what you need, it’s time to apply. Some lenders may let you apply online for a loan. A loan specialist can explain loan terms and help you complete the application process in person at your local bank.

Remember, the process is not over when you submit the application. After you apply, watch your phone and email for more requests from the lender. Respond to any requests quickly to help keep the process moving.

Depending on the type of loan and the lender, it can take from a few days to a few weeks to get approved for a business loan. Check with the lender to find out how long it will take to approve you.

So you’ve gotten approved for a loan. Now what? After you get a business loan approved, you’ll get a loan agreement. Follow these steps before you sign the loan agreement.

The contract is legally binding and has implications for your finances, including repayment responsibilities, so read it carefully.

The cost of a loan is more than the interest rate. Figure in all fees to know the total cost of borrowing. Be ready for fees to keep coming.

It’s important to understand what happens if you miss payments and default on a loan. If you have good debt management skills, you likely won’t default on the loan. But it’s best to know what the lender will do anyway in case you do default on your loan.

Make sure you fully understand every term in the loan agreement before you sign. Ask the lender for clarification on anything you don’t understand.

Applying for a business loan can be a challenge, especially for first-time business owners. But it’s possible to get approved. The secret to finding the best deal for you is preparation. Make sure you meet the lender’s requirements and also find the best fit in terms of loan size, repayment schedule and affordability. Compare loan offers and pick the one that works for you.

What do first-time owners need to qualify? In general, there’s no standard for what lenders want from first-time business owners. For example, some banks want a strong credit score and steady revenue, while online lenders may accept fair or poor credit and minimal revenue. You might be required to provide collateral or a personal guarantee backed by your personal assets to qualify.

Is getting a first loan hard? It can be. Lenders want proof of revenue, good credit and time in business. Invoice financing, merchant cash advances and online lenders with looser requirements can still fund startups and low-revenue firms.

Do banks offer startup loans? Not all banks will grant a startup loan, so check what they offer. SBA loans are backed in part by the Small Business Administration, and the SBA guarantee may improve your chances of getting approved. Most banks will require some proof of business revenue and good personal credit.

What’s the easiest financing to get? Lines of credit, invoice factoring and merchant cash advances offer easier approval for first-time owners, but the last two may be riskier. With strong finances, a regular loan gets easier.