[Free Guide] First Time Business Loans: How to Find Yours

So, you’ve been in business for a while now, and you’re finally taking the leap of faith to apply for a first time business loan. Congratulations!

This is an important step that some business owners find difficult to take, but financing can be crucial in pushing your company to the next level.

The application can seem intimidating, but when you apply through an alternative lender like National, it’s easy! This step-by-step guide will tell you everything you need to know about applying for (and receiving) a first time business loan (and what to do if you’re not quite qualified yet)!

Stepping up to the Challenge of Qualifying for Your First Loan

First time business loans have a reputation of being difficult to get. When you throw the fact that you run and operate a small business into the mix, the challenge can seem even greater. We’re here to tell you that, with the right approach, you can receive the financing you need to grow!

But if you’re new to the financing world, then the appropriate method might not be exactly what you expect.

Lenders, especially banks and direct lenders, tend to inevitably favor businesses with the best financials out there. This means a high credit score, awesome revenue reports, and glowing bank statements. Unfortunately, reaching these levels can seem impossible. 

For banks, there’s a lot more risk involved when there are no sure signs that your business will continue driving profits well into the future. Giving a first time business owner loan isn’t always a sound move for banks, especially with 50% of small businesses failing in the first five years.

It’s like applying for an entry-level job: if you don’t have experience, then how can you expect to get any? But this common misconception is far from the reality with first time business loans. Even if you’ve only been in business for a few months, there are ways that you can receive a loan without meeting the stiff bank requirements.

How to Get Your First Business Loan: A Three-Step Guide

If your business is moving onward and upward, then you’re well on your way to qualifying for a first time business loan!

But before moving into the process, it’s helpful to understand what’s expected for the best rates, amounts and terms.

To maximize your chances for getting the best offer, follow the steps below!

1. Build Your Personal & Business Credit Scores to at Least 625

Credit score isn’t the ultimate factor when it comes to qualifying for a loan. There are many different types of lenders out there, and while many of them can take credit score into account, its impact can vary quite a bit.

That being said, improving your credit score will only help you on your journey toward qualifying for the best first time business loan offers. If you’ve been in business for a while, lenders may look at your personal credit score, but if not, then they may use your personal credit score.

Without years of business transactions, chances are you don’t have a long business credit history. That’s completely fine! Your personal credit score still demonstrates your responsibility in making payments, and can qualify you for a first time business loan. 

When you apply, the following minimum credit scores can help your chances in qualifying:

  • 600-625 for a business credit score
  • 650 for a personal credit score

Most banks will have higher minimum credit standards for a first time business loan. But you’re not out of the race just because your credit score doesn’t satisfy bank standards. In fact, alternative lenders are known for giving out bad credit first time business loans!

While it’s not absolutely necessary, building your credit score can help you entertain the best financing options later on in the game.

Building Your Credit Score for A First Time Business Loan

You know credit score plays a role in helping you qualify for your first round of business financing. But what can you do to make it reach the best possible point?

You can raise your business and personal credit scores with the following advice:

  • Make full, punctual payments. Credit scores are anything but random, and most credit bureaus take your payment history as a primary factor. One of the most important ways you can build your credit score is repaying all of your personal loans, as well as business credit card transactions. 
  • Use your credit, but not the full amount. Financing and credit might be the key to helping your business grow. The more credit you’ve used, the more of a risk you are to the credit agency. As you build your credit score to apply for a first time business loan, it’s best to err on the side of caution, keeping your credit usage under 30%.
  • Don’t close older accounts (even if you no longer use them). Your credit history also plays a role in determining your credit score. Closing an account, especially an old one, can negatively impact your credit score.  
  • A diverse credit mix. If you’re just embarking on your journey as an entrepreneur, having a diverse credit mix might not be possible. But as you go, showing you can handle the responsibility of both credit card accounts and other installment loans will behoove you. 
  • No recent credit inquiries. Soft inquiries from alternative lenders like National won’t impact your credit score at all, but hard inquiries will remain on your credit report. If you’re planning to apply for a business loan, then keep other credit inquiries to a minimum.

These best practices can increase your chances of qualifying for the best possible offer at any stage, whether you’re applying for a first time business loan or your fifth round of financing.

2. Calculate How Much You Need for Your First Business Loan

It’s no secret that building your business to reach its full potential takes money. Regardless of your objectives, even the early stages of business growth take a hefty dose of capital.

So if you’re intending to make your first business loan a sizable one, then that’s ok!

But for a few reasons, you should calculate (almost) the exact amount that you’ll be applying for.

Every time you apply for financing, and especially when you apply for a first time business loan, you should be able to back up the request with an explanation. This doesn’t need to be a multi-page report; your time is better spent managing your business than preparing a presentation!

But to justify it both for yourself and the lender, having a plan is imperative. Keep in mind: there are no wrong answers, and what helps one business grow may or may not help another!

At the beginning of your business’s life cycle, expenses are natural, and can cover every base in your day-to-day, like:

  • Purchasing new equipment to improve your process, or the quality of your product.
  • Taking care of essential start-up fees (like website creation, incorporation, and other basic expenses)
  • Funding commercial property rent payments
  • Buying additional inventory
  • Making payroll 
  • Hiring a digital marketing service to generate new leads
  • Even more depending on your industry

The key here is to think big, as you’ll want a large enough first time business loan to drive the maximum impact!

But on the flipside, you should also be careful to avoid making an unrealistic request. Asking for more capital than you need will increase your interest rates beyond the necessary point.

If you request an amount that’s impossible for lenders to give, then a bank might not notify you for several weeks or months. Alternative lenders have a much faster turnaround, and may contact you about reaching a more reasonable amount in a day or two.

As a business owner, it’s also crucial for you to avoid taking on unnecessary debts, or debts that you won’t be able to repay.

Another important number to keep in mind when calculating your first time business owner loan amount is the debt service coverage ratio (DSCR). 

Calculating Your Debt Service Coverage Ratio (DSCR) for Your Business Loan

The purpose of this number is for lenders to determine the amount of cash you have to repay your debt, or loans. But, it also doubles as a simple way to find out how large a loan you can afford, considering interest rates.

Running the numbers to calculate your DSCR for your first time business loan is actually quite simple.

The easy equation for finding your DSCR is:

Cash Flow / Loan Payment = DSCR

For some businesses with seasonal fluctuations, this number can change on a monthly basis. But you can also calculate a general annual DSCR, which is helpful in most cases.

The DSCR is measuring your business’s cash flow, or total sales after expenses, for each month. 

If your monthly cash flow is $6,000, and you expect loan payments from both principal and interest to be around $2000, then your DSCR would be 3. That’s great!

For basic payment purposes, your DSCR must be higher than one. Any DSCR lower than one indicates that your business won’t necessarily be able to make payments based on current cash flow.

As long as your DSCR is above one, you’re in a position to repay each loan. Anything above one indicates your business in an even better position to do so!

3. Prepare to Apply for Your First Time Business Loan

Applying for your first business loan can feel like stepping into the big city for the first time. There’s information, advice, and qualifications listed everywhere, and everything appears to be different. 

Not every loan application is like this!

Banks have a reputation of never-ending applications. Alternative lenders streamline this application and approval process, but we’ll get into that more later on.

Nonetheless, some lenders tend to put you under a microscope more than usual when you’re applying for a first time business loan.

If you’re just entering the world of small business loans, then it’s common to feel overwhelmed by the information and qualifications. All lenders have different requirements and qualifications for a first time business loan, but this is a complete list of anything that could come up once you start to apply:

Business Plan for a First Time Small Business Loan

If your business is just getting fired up, your financials won’t exactly prove that you’re ready for a first time business loan. Instead of a credit score, a business plan can prove your business is ready to tackle the challenge of paying back capital.

This plan of action will demonstrate each step your business is planning to take (before and after) receiving capital. 

Most alternative lenders won’t require a business plan to consider you for a first time business loan, but banks may not be so lenient. Through a business plan, traditional lenders are interested in finding out:

  • Who your customer base is
  • How you plan to generate revenue
  • The structure of your organization
  • Opportunities, competitors and other details about your market
  • How you plan to market your company, and increase sales
  • Expected sales after implementing your new plan

Distilling these details into a business plan shows how you’re fighting on the front lines for your business to grow!

Finding Collateral for a First Time Business Loan

Not all first time business loans are secured by collateral, and alternative lenders are willing to provide unsecured loans for companies that qualify.

But banks and other traditional lenders might be reluctant to issue a loan without collateral.

Collateral is any asset that the lender can seize in the event you don’t repay the loan. When you receive equipment financing, the equipment itself functions as the collateral.

Often, banks will look for commercial real estate as collateral for a first time business owner loan. With alternative financing options, no collateral is required, which offers an important solution for business owners in this situation.  

But if you are putting up collateral, then be sure to document it clearly and thoroughly. 

The Documents You Need for a First Time Business Loan

An endless pile of documents is one of the biggest reasons people put off applying for their first business loans.

But like the other requirements to qualify for a business loan, there’s a spectrum of qualifications that lenders can require. Alternative lenders rarely require anything other than a few bank statements and a digital application. On the other hand, banks and direct lenders are at the opposite end of the spectrum.

Download Qualification Checklist

Document requests can also vary depending on the loan program you’re applying for. For example, if you’re hoping to qualify for an SBA loan, then your lender might require more documentation than short-term loans.

As you begin searching for your first loan, though, ensuring that you can satisfy every potential requirement is key. Lenders might ask for the following documents, but will but may not require everything listed below:

  • Licenses and permits
  • Employer ID Number
  • Income Statements
  • Bank Statements
  • Balance Sheet
  • Personal & Business Tax Returns
  • Copy of Commercial Lease
  • Business Debt Schedule
  • Accounts Receivable Aging and Accounts Payable Aging
  • Payroll from 6 Months
  • Entity structure paperwork (articles of organization, articles of incorporation, partnership)
  • Certificate of Good Standing
  • Sales Agreement & Financials (if you’re acquiring a competitor)
  • Contracts with Suppliers
  • Corporate Bylaws or operating procedures
  • Purchase agreements

Like we mentioned, you won’t be required to provide lenders with this whole list of documents. But before you come up short, it’s best to know what they might request for a first time business loan.

Control Your Internet Presence By Editing Online Profiles Before a First Time Business Loan

Some lenders may research beyond your financials, and instead examine what people are saying about your business.

In the digital age, lenders can easily look to your website to learn about your reputation.

Before applying for your first time business loan, be sure that your online reputation speaks to your credit worthiness! You can accomplish this by keeping any information about your business, products or services up to date and staying active and responsive on social platforms and review sites.

Recent positive reviews from Google, Yelp, TrustPilot or any similar review platform can play a huge role, too. When lenders see that people are satisfied with their experience, they’ll be more likely to move forward with your applications. These reviews also prove your credibility.

Where Should You Apply For Your First Business Loan?

Not all business loans are created equal—the lender you choose can play a huge part in determining what you qualify for. Not to mention, the hoops you have to jump through, and the time before the funds are deposited in your account. 

Approaching the right lender for your business can save time, while also providing the best financing option right away.

So if you’re applying for a first time business loan, what are the best programs to apply through?

Banks: Low-Interest, But Impossible Terms & Long Wait Times

Banks and business loans went together like peanut butter and jelly. Until now.

While banks are the oldest and most conventional way to get a business loan, they’re notorious for a long-winded process and strict qualifications. When you’re applying for a first time business owner loan, the barriers to entry are even greater. 

It’s natural to be attracted to the lower interest rates. But, small business loans are only worthwhile for banks when they’re at least $500K— which is well outside the ballpark for slowly growing companies. Additionally, the process can go on for weeks or months— while less traditional alternative lenders can have your business funded quickly.

If you apply through a bank, you’ll likely wind up having to pursue other channels.

Direct Lenders: Appealing Rates, High Rejection Rates

Direct lenders appear to have all of the best parts about bank loans, without the bureaucracy. But if you apply, you’ll find that most direct lenders are not exactly willing to dole out first time business loans to newly growing businesses, either.

The process may be faster, and is definitely more convenient than a bank. But with no ground to stand on, you might have to continue your search elsewhere.

The SBA: Long Wait Times & High Standards for New Businesses

SBA loans are one of the most desirable financing products for small business owners, and for good reason. The Small Business Administration backs these loans, meaning that if you default, the government pays the balance of the loan.

But as the loan must be processed through the government (and often, a lender or bank as well), this is not a quick route to financing. Approval periods can last weeks or months. Small businesses hungry for financing to pursue a time-sensitive growth opportunity should look elsewhere.

Online Lenders: Quick Application But Non-Competitive Rates

Online lenders can eliminate the frustration and time obligation of meeting with a loan officer in-person. But when you’re pursuing a first-time business loan, you may find yourself filing multiple applications.

Thanks to the rise of fintech, online lenders are quick to notify you about whether or not you qualify for the desired amount, and at what rates. However, the obvious disadvantage here: it’s tough to know whether or not the interest rates are the best, considering the market.

Alternative Lenders: Lightning-Fast Process With the Best Offers

Not all online lenders offer alternative loans, but all alternative lenders have some type of a web interface. This makes getting a first time business loan quick and simple.

At National, our global marketplace compares rates & terms from over 75 lenders. This dynamic, fast-paced technology accelerates the funding process to ensure you can utilize your funds before your opportunity window closes.

With a Business Finance Advisor overseeing your account, we can ensure that you receive the best offer for your business.

Best First Time Business Loans

After thinking about the steps it takes to qualify for a first time business loan and the various lenders available, it’s important to consider which type of loan program makes sense for your business.

Your business and industry can influence which loan makes the most sense for your small business, but your financials play a huge part in this as well. 

These options are often determined based on your credit score, annual revenue, time in business, as well as other factors that either project profit or indicate stability.

Banks and direct lenders tend to offer fewer types of loans, too.

If your credit history is spotless, then you’ll have plenty of options available. But even with challenged credit, you’ll still find that there are plenty of available options that help you get on the right path to your first business loan.

So, which type of first time business owner loan should you choose?

Term (Small Business) Loans

Standard short- or long-term small business loans are the simplest, most straightforward loan option. When you’re looking for a first time business loan, it’s crucial to consider a term-based program.

Like others, these loans are deposited in lump sums, rather than incrementally. For this reason, term loans make the most sense when you’re pursuing an opportunity with one expense, rather than a string of payments over a period of time. Once you receive the capital, though, you can use it however you choose.

Depending on your agreement with the lender, term loans can be paid off in the short-term, or up to as long as ten years. Longer terms mean higher interest rates, but smaller payments and more flexibility to make these payments.

Banks tend to avoid keeping loan agreements flexible, but alternative lenders may adjust the terms to fit your needs.

SBA Loans

SBA loans have become a favorite of small business owners looking for funding at any stage, and for good reason.

This funding is backed by the SBA of the government, meaning that the government promises to pay the balance of the loan in the event the borrower defaults. Banks, direct and alternative lenders can all issue SBA loans.

With the money backed by the government, lenders are willing to provide more favorable terms, amounts and rates. This means the same low interest rates as a bank loan, but without the frustrating application and approval process that comes with it.

However, as these loans are backed by the government, they can be somewhat difficult to qualify for at this early stage. Funding might not come quickly, either.

That’s where bridge loans can come into play!

Hybridge Loans

When you want to act with your financing right away but don’t want to give up on low interest rates, a hybridge loan is the way to go!

This is a perfect first time business loan for businesses with the financials to qualify for an SBA loan, but an immediate need for cash on hand.

Once you qualify, a portion of the funds you requested will be available in your account in less than three days. You can use these funds to accomplish any business growth objective ahead of you!

In the meantime, you can move through the process of qualifying for an SBA loan. Once you qualify, you can utilize that larger amount to make even greater strides in your business. 

Equipment Loans

Equipment loans are another common first time business loan, and for good reason.

In any industry, equipment can make or break your ability to succeed. When your business is new and still searching for a foothold, leasing or purchasing the proper equipment can improve your ability to provide the best value to customers, especially with competition to ward off. This equipment can be a major stepping stone along the path to success.

Unlike a term loan, equipment loans never require any collateral. Instead, the equipment itself acts as collateral. For this reason, equipment loans are typically easier to qualify for than other types of loans. 

While the lender is responsible for purchasing the equipment, you have the freedom to select the vendor or supplier. Payment terms may even provide up to five years for you to repay the loan!

Purchase Order/Invoice Financing

Delayed invoice payments from larger companies can be a killer in any industry, especially when it comes to new businesses. For this reason, purchase order financing, also known as invoice financing, can be an invaluable first time small business owner loan.

When you choose this type of loan, you’re actually selling your invoice to a lender. Once your clients make payments, this money is routed directly to the lender.

Alternative lenders can offer incredible turnaround times to make invoice financing a realistic option for getting by in a pinch.

Merchant Cash Advance

If you have a restaurant, store or other business that involves daily credit card transactions, then a merchant cash advance could be the way to go. Interestingly, it’s not technically a loan in the way that many of the above financing options are.

Merchant cash advances are given by lenders to businesses that process plenty of daily credit card transactions. But instead of paying back the loan after a set period of time, you pay back a merchant cash advance by putting a percentage of each credit card transaction toward the debt. This makes for a simpler, easier funding process and a seamless payment strategy!

As a first time business loan, the merchant cash advance is quick and easy to access, and can be paid over the course of 8 or 9 months.

What To Do if You’re Turned Down for Your First Business Loan?

So, you’re a new business owner working hard each day to push your company to the next level, and unfortunately, you didn’t quite qualify for the financing you needed. Is that the end of the road?

No!

Especially in the early stages, it’s entirely possible for your company to miss the market by just a little. However, there’s plenty that you can do to improve your business without a capital infusion, or to prepare to qualify in the future.

1. Check Your Application for Errors

With first time small business owner loans, the devil is in the detail. Even a minor mistake can throw your business loan application off, and lower your chances for approval on the loan application. 

For this reason, you must double- and triple-check your application for errors! Treating your loan application (and any documents that accompany it) will keep this document iron-clad, and boost your chances for qualifying.

2. Lower the Amount on Your Application

As a business owner, it’s your responsibility to dream big about ways to improve your business. Larger loan amounts can help you accomplish more in your business, but when you don’t qualify, lowering the amount might be the key to success.

Reducing the amount to a smaller number means the lender is taking on less risk. As a result, they will be more likely to approve you for this lower amount.

Most bank loans are open and shut cases, and loan officers won’t afford borrowers the opportunity to request a lower amount without re-applying on a multi-month timetable. Reconsideration or adjustments to terms, amounts and other aspects of the loan won’t be simple, and can slow you down by quite a bit.

But alternative lenders are more attuned to the ebbs and flows of today’s business world. They’ll be more than happy to reconsider you for a lower amount!

3. Improve Revenue and Profit Margins Using Business Services

It’s not uncommon for business owners to wear many hats throughout the day— especially at young companies! While this is an easy way to cut down on costs, time spent handling bookkeeping and payroll can add up, and start to detract from revenue.

Capitalizing on business services is an easy way to improve your company’s structure and double down on generating higher revenue by freeing up your time!

With greater efficiency than a standard employee, business services can put your company in a stronger position to succeed and drive revenue. Then, after reaching the next milestone, you can re-apply for your first time business loan.

4. Avoid Approaching Investors

If you can’t find the right source of funding, then it’s natural to consider alternatives like investors. This short-term solution creates a major long-term problem: you’re forfeiting full control over your revenue, and your company.

Selling shares in your company means that investors will have access to a percentage of your revenue for years to come. This can actually be significantly more expensive than a loan in the long run. 

Instead of relinquishing full access to your revenue by selling shares, consider the above alternatives to get your business funded.

Business Financing Advisors Guide You Toward Your First Business Loan

Getting a first time business loan can be an unpleasant experience without the right people working to make it happen.

At National, we’re committed to building a culture of success by working with you at every stage of the process.

After you qualify, we’ll work within our Global Marketplace of 75+ lenders to find the best loan options for you. Then, you’ll have the freedom to choose the amount, rates and terms that work for your business needs!

Get started today by filling out an application!

National Business Capital & Services is the #1 FinTech marketplace offering small business financing and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.

Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.

We strengthen local communities one small business loan at a time.
For every deal we fund, we donate 10 meals to Feeding America!

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About the Author, Megan Capobianco
Megan Capobianco is the Marketing Manager at National Business Capital & Services. Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.