Not all debt is created equal. In some instances, some types of debt may help your small business grow. If you’re pouring your heart and soul into your small business and are ready to expand, learn more about how you may be able to get your first small business loan.
Your first time applying for a small business loan may come with lots of questions. Which types of financial statements and other paperwork will you need? Will you really be able to afford the loan? The tips below on getting a first-time small business loan answer these questions and several others.
1. Determine why you need this loan
Lenders will ask your reason for seeking funding, and you should have your answer nailed down. Reasons likely fall into one of these categories:
- To start your business
- For cash flow to manage day-to-day expenses
- For business expansion
- To build savings
Your purpose for seeking a loan will help you identify whether you’re trying to fill a short-term or a long-term financial need. You’ll also need to determine when you would like to repay the loan. Long-term loans generally have the lowest interest rates and 10 years or more to pay off, resulting in low monthly payments. If you’re in it for the long haul, long-term is often best. If you plan on an early payoff, check with your lender about penalties.
2. Prepare your business plan
According to the small business mentoring organization SCORE, a business plan has two primary purposes. First, it acts as an organized roadmap to help you analyze your plans for marketing, sales, production, distribution, and other business functions.
The second purpose is the reason many entrepreneurs put together a plan: seeking funding from a bank, credit union, or other type of lender. Some lenders will not invest in your company unless you present a business plan that demonstrates your steps to success.
Banks want to mitigate their risk of default, and private investors, such as angel investors, want a realistic forecast for when they will get a return on their capital.
Your business plan will also indicate when you need funding and help you determine the amount you are positioned to responsibly borrow to meet your short- and long-term goals.
A good business plan includes the following elements:
- Executive summary. This introductory paragraph gives a broad but succinct overview of what your business plan will include.
- Company description. This elevator pitch summarizes your business’s backstory and what it provides. It names the problem your business will solve and states your future goals.
- Target audience. In this section, you’ll state which customer segments your business intends to reach. Informed consumer research is the bedrock of this section.
- Market analysis. Here, you’ll detail your industry and market and whether your products and services could make a reasonable impact.
- Organization and management. In the organization section of your business plan, you’ll detail who reports to whom and name your departments, managers, and leaders.
- Services or products. Here, you’ll describe what you’ll sell and how you’ll sell it. Be sure to discuss your pricing, marketing, sales, website, order processing, equipment, and any potential legal issues.
- Marketing and sales. In this section, you’ll explain your marketing plan without giving away its core details.
- Break-even analysis. This analysis pinpoints when your sales and expenses will reach an equal amount. Thereafter, if you sell more products at your base price, you’ll profit.
- Financial plan. Your income statement, balance sheet, and cash flow statement comprise this section. It’s the easiest way for lenders to assess your financial standing and risk as a borrower.
- Operations. Here, you’ll list the facilities, stock, and equipment you need and detail their costs.
- Competitive analysis. How does your business compare to its competitors? How will you keep up? You’ll answer these questions in this section.
- Objectives. Here, you’ll break down your goals into smaller objectives and explain how you’ll reach them. This way, lenders are able to know you have a plan to get where you’re going.
In short:
- A business plan is an organized roadmap for planning sales, distribution, marketing, production, and more.
- Your business plan also doubles as an important document when applying for small business loan programs.
- A good business plan may help you determine when to seek financing options and how much you are positioned to borrow.
- Your business plan should include roughly a dozen sections that detail your products, services, marketing, competitors, target market, and more.
It’s worth noting that some lenders, such as SmartBiz Bank®, may not require a business plan. However, this doesn’t mean that you shouldn’t include one with your application.
3. Speak to a financial professional
You should have a financial professional help you crunch the numbers before you seek financing. If you don’t have an accountant on your team, you may want to review this article to consider hiring one: How to Hire an Accountant for Your Small Business.
4. Decide which type of loan is right for you
Your reasons for needing the loan will help you decide on the type of loan to apply for. Businesses that are less than a year old may face some obstacles when it comes to getting a loan. Lenders sometimes require cash flow to support repayment of the loan, so startups are typically disqualified from financing. Instead, starting entrepreneurs may rely on business credit cards, borrowing from friends and family, crowdfunding, personal loans, or a microloan from a nonprofit lender.
For businesses with a year or more of history and revenue, you may have more financing options, including SBA loans, bank term loans, business lines of credit, and invoice factoring.
5. Determine the best small-business lender to work with
Unfortunately, not all small business lenders are on the up-and-up. Confusing language and calculations may result in paying much more than you think you signed up for. Make sure you work with a lending professional who is responsive and answers all questions clearly. Stellar customer service support is key.
6. Check your qualifications
Go into the loan application process with a thorough understanding of the financial situation of your business. Check the following details:
- What is your credit score? It’s important that every small business owner is aware of their credit scores and actively monitors them so they are able to quickly address any errors on their credit reports. Both business and personal credit scores are important and will likely determine which loans you’ll qualify for.
Credit score requirements often vary from one lender to the next. For example, SmartBiz Bank® generally requires credit scores of 660 or higher, while other lenders may require a score higher than 680. You should also find a lender who does an initial soft credit pull, also called a soft inquiry.
- How long have you been in business? In addition to your credit score, lenders consider how long you’ve been operating your business. Businesses with a shorter history may have to prove financial trustworthiness in other ways.
- Do you have enough income? Many lenders require a minimum annual revenue, which may range anywhere from $50,000 to $150,000 annually.
- Can you make the payments in full for the life of the loan? Look carefully at your business’s financials — especially cash flow — and evaluate how much you should expect to reasonably afford to apply toward loan repayments each month. Some online lenders require daily or twice-monthly repayments, so factor that into the equation if that’s the case. 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.
7. Gather documents
Each lender will have slightly different paperwork requirements. In general, documents required include:
- Business tax returns
- Income statements
- Balance sheets
- Schedule of liabilities
- Personal tax returns
How much should I borrow?
The right loan amount should be based on what your business needs to accomplish and what you may be able to realistically afford to repay. Start by identifying the specific expenses you want to cover, such as equipment, inventory, working capital, or expansion costs. Then estimate the full cost of the project rather than borrowing based on a round number or the maximum amount a lender is willing to offer.
It's also important to consider your cash flow. A loan payment will become another recurring business expense, so make sure your projected revenue and cash flow are positioned to support repayment while leaving enough room for normal operating costs and unexpected expenses. Borrowing too little may leave a project underfunded, while borrowing more than necessary may increase interest costs and create unnecessary financial pressure.
What happens after you apply?
After you submit a small business loan application, the lender typically reviews your financial information, credit history, business performance, and ability to repay the loan. The lender may request additional documentation or clarification during the underwriting process, so responding promptly may help keep the application moving.
If the loan is approved, you will be informed of the proposed loan amount, interest rate, repayment schedule, and other terms to review before accepting the financing. Once the loan documents are completed and any remaining conditions are satisfied, the lender is able to fund the loan according to its process. If the application isn't approved, ask the lender to explain the primary reasons for the decision and what steps may strengthen a future application.
Benefits of getting a small business loan
Small business loans may provide access to large sums of money you might otherwise need several years to earn. Their interest rates are typically more competitive than other forms of funding such as business lines of credit or business credit cards. And though you might be inclined to choose alternative online lenders for their convenience, most of them have unreasonably high interest rates. An online SBA lender may be just as convenient at much lower rates.
Better yet, there are six types of SBA loans, so you may find the one best suited for your needs. These loans include small-dollar loans like the SBA microloan program and larger loans like SBA 7(a) loans. Where microloans might help you obtain inventory, 7(a) loans may help you purchase commercial real estate. There are several allowable purposes for an SBA loan, and a lender may be able to help you choose the right option based on what you need the funding for.
If you are looking for your first small business loan, SmartBiz Bank® may be able to help. Find out if you pre-qualify today.
FAQs
How do I get my first small business loan?
Start by determining how much you need, what you'll use the funds for, and whether your business has the cash flow to support repayment. Then, compare lenders and loan types, review their eligibility requirements, and gather documents such as business and personal tax returns, financial statements, and bank statements. Submitting a complete application with accurate, up-to-date information may help make the process smoother.
What credit score do I need for my first business loan?
There isn't one universal credit score requirement for a small business loan. Lenders establish their own credit standards and may consider both the owner's personal credit and the business's credit history. Credit is only one part of the evaluation, however. Revenue, cash flow, time in business, existing debt, and repayment ability may also affect whether you qualify and what terms you receive.
How long do I need to be in business to get a small business loan?
Requirements vary by lender and loan type. Some lenders work with newer businesses, while others prefer companies with an established operating and financial history. If you're a relatively new business, be prepared to provide strong documentation showing your revenue, cash flow, business plan, and ability to repay the financing. An SBA-backed loan may also be an option for an eligible business that meets applicable SBA and lender requirements.
What documents do I need to apply for a small business loan?
The exact requirements depend on the lender and financing product, but you may need business and personal tax returns, profit and loss statements, balance sheets, cash flow information, business bank statements, and documentation related to existing debts. You will also be asked to explain how you will use the funds. Asking the lender for a document checklist before applying may help you avoid delays.
What type of business loan is best for a first-time borrower?
There's no single best loan for every first-time borrower. A term loan may work well for a defined, one-time expense, while a business line of credit may provide more flexible access to working capital. An SBA loan may be worth considering for eligible businesses seeking financing for qualifying business purposes. Compare the loan amount, repayment period, interest rate, fees, and intended use of the funds before choosing.
Can I get a small business loan if I have bad credit or limited business history?
It may be possible, although your options may be more limited and financing could come with different terms. Lenders may consider factors beyond your credit score, including revenue, cash flow, collateral, time in business, and overall ability to repay. Before applying, review your credit reports for errors, organize your financial records, and consider whether waiting to strengthen your application may improve your financing options.
