A small business loan can help you successfully start and grow your entrepreneurial enterprise. As a small business owner, you may not have the working capital needed to invest in the supplies or people to help you get your business off the ground. There’s no shame in that whatsoever — countless small businesses rely on financial assistance to get up and running. A loan could be your answer, just make sure you’re informed as you look into this option.

While a new business loan can help you achieve your entrepreneurial dreams, it’s also worth noting that this type of loan carries responsibilities you shouldn’t take lightly. For instance, if you fail to make a monthly payment, the lender could institute a collections process or seize assets from your business as a form of payment.

With this in mind, again, you don’t want to take out a new business loan uninformed. Below, we’ll walk you through what you need to know about taking out your first business loan while answering any questions you might have about the application process to help you decide if this funding option is right for you.

What is a business loan?

A business loan provides the cash flow you need to establish, grow, and sustain your business. Whether you’re an individual freelancer or a multi-person startup, there will likely come a time when you could use this kind of extra cash flow. Some self-employed individuals assume that startup loans aren’t relevant to them, but this might not be true.

Say you’re a graphic designer, and after years of working in an agency, you’ve decided to become your own boss. To get started, you’ll have to invest in tools that were once provided by your company, such as a computer and design software like Adobe. This is on top of general startup costs, like creating a website and getting business cards. All of these expenses can add up, which is where a small business loan comes into play.

Here are some common reasons that entrepreneurs apply for loans:

  • Startup costs (equipment, training, machinery, etc.)
  • Day-to-day expenses (utilities, rental space, payroll, vendor costs, etc.)
  • Growth (hiring employees, scaling up machinery or equipment, vehicles, etc.)
  • Safety net (e.g., if you want a cash flow buffer to pay vendors and ensure your business still has the funds to operate, even when clients are late on payments)

The type of loan you get will depend on a few factors, so if you’re unsure where to start, we suggest visiting the United States Small Business Administration (SBA) site. They work with lenders to provide competitive terms and unique benefits, from flexible overhead requirements to lower down payments. Once your business has generated revenue for at least a year, more types of loans, including those from private business lenders, will become available to you.


Applying for a Business Loan for the First Time

As a first-time business owner, it can be overwhelming to figure out what business financing options are available to you as a borrower. You want to make sure you choose the best loan program to suit your unique needs. 

We’re here to help you explore the different loan options, and as a first-time business loan applicant, you’ll want to start with these four basic steps:

  1. Do your research
  2. Check your credit score
  3. Organize necessary documents
  4. Apply!

1. Do your research

As mentioned, lenders can provide loans for things like starting a business, growing a business, operational costs, and even providing a safety net. It’s important that you research what loan is best for your needs. Once you have the purpose of your loan defined, you can look at the different types of lenders available and see which one best fits your needs.

Here are some of the different types of lenders:

  • Banks: A traditional financial institution can provide a line of credit, term loan, or (if your purpose is to purchase or refinance real estate) a commercial mortgage. You can also get some SBA loans through banks, including disaster loans (if your business is impacted by an event like a pandemic, flood, or fire). SBA loans can go up to $5.5 million
  • Pros: Banks usually offer the lowest annual percentage rate (APR), an annual representation of the interest rate you can expect.
  • Cons: Small businesses may struggle to get approved for traditional bank loans due to insufficient cash flow and sales. If you don’t have collateral (an asset you use to secure a loan, like a house or a car), you may not be able to get this type of loan. It can also take some time to secure funding.
  • Why would you take this type of loan? You might consider a bank loan program if you have good credit, can offer collateral, and aren’t in a rush to get financing. For example, say you run an interior design company. You want to open a showroom to advertise your services and need commercial retail space to do this. You own a home and car and can offer these for collateral against a bank loan. You also have some work, and the showroom isn’t a pressing issue, so you decide to take the lower interest rate from a bank loan and wait until it’s ready.
  • Online loans: Online lenders provide lines of credit and small business loans of anywhere from $1,000 up to $5 million. The percentage rate on such a loan is hugely variable, ranging from 6% to 99%. The exact terms depend on what you need the loan for, your credit history, whether collateral is needed, and the loan itself (e.g., type, size, repayment terms).
    • Pros: Approval rates for online lenders are generally higher, and you’ll likely get the money you need faster. 
    • Cons: The APR tends to be higher.
    • Why would you take this type of loan? You might use an online lender if you need cash fast or lack collateral. For example, say you run a small carpentry company. Thanks to word of mouth and some positive reviews from existing customers, you’ve just been offered the chance to tackle a project that’s much larger than what you usually do — handling the carpentry for a new office building. You’ll need more workers and tools to get the job done. A quick loan from an online lender ensures you can get the equipment and people you need, so you can take the job instead of having to pass due to a lack of resources.
  • Microloans: If your company is too small for qualifying for a traditional loan (e.g., you’re a one-person operation and your annual revenue falls under a certain amount), you can turn to a microlender. Microlenders are actually nonprofit organizations. They extend short-term loans, usually not exceeding loan amounts of $50,000. 
  • Pros: You can get fast loans for small amounts.
  • Cons: The APR on these types of loans tends to be higher than that of a traditional bank loan. Also, you can’t get enormous loans since these are, by definition, “micro.”
  • Why would you take this type of loan? You might consider a microloan if you don’t qualify for a traditional loan because of lack of collateral, bad personal finances, or limited business history. Say you are trying to start a small consultancy on your own, for example. You have bad credit due to a defaulted car payment years ago. A microloan can give you the funds you need to start operating without waiting to rebuild your credit.

2. Check your credit score

Your credit score is an important indicator of your financial health. It’s based on your financial history and considers everything, from whether you pay your utility bills on time to whether you’ve ever defaulted on a loan. Even though you are applying for a business loan and not a personal loan, lenders will look at your personal credit score. It’s a reflection of your fiscal responsibility and helps them assess your reliability (and how likely you are to pay them back).

Before you apply for any loan, find out your credit score so that you know where you stand. Knowing this baseline also allows you to take steps to improve your credit. According to the U.S. Federal Trade Commission (FTC), you are entitled to one free credit report every 12 months (you can still get additional credit reports in a single year, but you’ll have to pay for them). Visit AnnualCreditReport.com for details on how to request yours.

If you have a good credit score, you’re more likely to qualify for a business loan with a good interest rate and favorable terms. Ideally, your score should be at least in the mid-600 range. However, if you’re falling below this, don’t panic. Your credit score isn’t permanent. It’s always changing, and there are ways to improve it. Here are some ways you can improve your credit score:

  • Pay your debts. Always pay credit cards, loans, and debts on time and, if possible, in full. Your payment history makes up about a third of your credit score. A history of timely payments is critical.
  • Keep your accounts open. A longer credit history will be viewed more favorably than a shorter one. Closing old accounts can actually hurt your credit score.
  • Check your credit report for mistakes. The FTC reports that 5% of consumers have discovered mistakes in their credit scores that could decrease their odds of getting a favorable loan. If you find a mistake, alert the relevant credit bureau.

3. Organize necessary documents

You can save time when applying for a loan by gathering all the paperwork you need in advance. Here’s a list of what you may need:

  • Tax returns: You or your tax assistant should have these on file. If you can’t locate them, contact the Internal Revenue Service (IRS) to request copies of your old returns.
  • Bank account statements: You can usually download old statements via online banking portals. If you don’t use online banking, you can go by your local branch in person.
  • Credit score: As mentioned, you can request a free credit score once per year. Visit AnnualCreditReport.com to find out how.
  • Financial statements related to your business: From the start, you should get in the practice of producing a quarterly profit and loss statement, an earnings forecast, and a receivables and accounts payable balance. (If you haven’t created these yet, look them up! They’re valuable figures that will tell you a lot about your business.)
  • Legal documents related to your business: These might include the Articles of Incorporation, a franchise agreement, a commercial lease, etc.
  • Business plan: A written business plan outlines how your business is managed and run on a day-to-day basis. Here’s how to make one if you haven’t yet.
  • Proof of collateral: If you plan to put up collateral for a loan, you need evidence. For example, you might include a copy of the title deed to your house or car.

The exact paperwork requirements will vary depending on the type of loan you are applying for. This is just an overview of some basic documentation you’ll need.

4. Apply!

Once you have all your documents organized, you can apply for your business loan. The process will vary depending on the lender and type of loan you are applying for. If possible, try to look at two or three different options, comparing interest rates and terms. Ideally, you’ll secure a loan with the lowest possible APR. Keep in mind that response times will vary. As mentioned, a traditional bank loan will involve a longer review process than a microloan or online loan.


More Resources for First-Time Business Owners

A loan can help you start, grow, and maintain your business, ensuring long-term success. Finding the right loan for your business will take some time and effort. However, you don’t have to go through the process alone. ZenBusiness offers a variety of services to help entrepreneurs grow their businesses.

FAQs for First-Time Business Loans

  1. 1. How do I get a first-time small business loan?

    You’ll need to apply and provide paperwork, such as a business plan, credit report, and old tax returns, to apply for a loan. The loan application process depends on the type and purpose of the loan. You can apply via an online lender, a traditional bank, or a microloan nonprofit.

  2. 2. What is the easiest business loan to get?

    Applying for any type of loan requires you to go through a thorough application process and provide documentation attesting to personal and business financial details (tax returns, credit reports, etc.). In general, the smaller the loan is, the easier it will be to get. Microloans and online loans are usually faster and require a less rigorous approvals process than traditional bank loans.

  3. 3. What credit score do you need to get a small business loan?

    A solid credit score (mid-600s range) will make it easier to get a loan with a low interest rate and favorable lending terms.

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