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It is likely a notable time in company history when your business needs its first loan. Whether you are fueling growth, hiring an employee, making repairs, or refreshing your storefront, there are many reasons why business financing is needed. However, there is a lot to know about the first time you go through the business loan application process. When you understand the process and requirements ahead of time, it will allow you to prepare an application that has a greater likelihood of being approved. In the following 7 sections, we break down what you must know to apply for your first business loan.

Types of loans small businesses can use

For first-time business loan applicants, knowing what type of loan is right for your small business is key. There are many types of business loan financing options to choose from. Here is a quick look at many popular types of loans and financing options businesses can use:

Business credit card: while not a business loan, a business credit card can be an alternative or supplement to a business loan. Some startups might struggle to obtain a business loan in the early days and a business credit card is a viable alternative.

Business line of credit: A business line of credit can be easier to get approved for than a business loan and provide higher credit limits than a business credit card.

Merchant cash advance: A merchant cash advance is not a loan. It gives you access to funds based on your future sales or receivables.

Working capital: businesses can obtain funding via working capital loans in the $25k – $2M+ range. Funds can be used to grow your business, cover one-time business expenses, hire staff, buy equipment, pay down operational costs, purchase inventory, and expand your workplace. Paid back from business receipts.

Term Loan: established businesses can obtain funding via term loans in the $25K – $500K range. Funds can be used for a broad range of business needs.

Commercial Real Estate: Businesses can leverage their commercial real estate equity to obtain funding via CRE loans in the $250K – $6M range. Funds can be used to grow your business, acquisition of a new business, refinance an existing project (cash out), fund a renovation project, or refinance existing business loans.

U.S. Small Business Administration loans: From $500 to $5.5 million to fund or expand a business, there are several types of SBA loan programs designed specifically for small businesses including microloans, 7(a) loans, and 504 loans:

  • The SBA microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000.
  • The SBA 7(a) loan program is the SBA’s most common loan program which includes financial help for small businesses with special requirements. This is the best option when commercial real estate is part of a business purchase, but it can also be used for short-term and long-term working capital, refinance current business debt, and purchase furniture, fixtures, and supplies.
  • The SBA 504 Loan Program provides long-term, fixed-rate financing for major fixed assets that promote business growth and job creation.

Next, let’s review the general qualifications for business loans and credit options. Keep in mind that each business lender will likely have qualifications for each of their loan options, and the information below is a general guideline for what you will encounter.

Qualifications

Businesses applying for their first loan might be surprised at the qualifications needed to obtain a loan. Understanding what lenders need ahead of time will help make the process easier. Listed here is a high-level overview of what data the lender will use to evaluate your loan application:

  • Credit Scores: Your creditworthiness and credit report will impact the interest rates you are offered and your repayment terms. Minimum credit score requirements vary depending on the type of lender, the type of loan, and the size of the loan. Existing businesses will have their business credit score pulled. A new business without a lot of history will likely need a personal credit score of the owner pulled. In some cases, the lender might ask for both. Financial institutions like a traditional bank or credit union might weigh a personal credit history more than an online lender. 
  • Revenue: Certain loans require small businesses to meet an annual revenue threshold. For example, term loans from Biz2Credit require annual revenue of $250K or greater. 
  • Time in business: Loans can require that a small business is in operation for a certain amount of time. For example, working capital loans from Biz2Credit require at least 6 months in business. 
  • Collateral to secure the loan: A lender might require that you collateralize the loan or provide a personal guarantee for you to qualify. You can provide assets such as personal property as collateral for your loan. Other types of collateral that lenders might accept are cash, stocks, car, boat, bonds, insurance policies, equipment, etc. If you default on your loan, the lender can take legal action to collect what is owed to them by forcing the sale of your personal property or having it repossessed. Read our article How to Prevent a Business Loan Default for additional information on loan defaults.
  • Business plan: See the section below titled, “Business Loans” for more information.
  • Documentation: See the section below titled, “Documentation” for more information.

How much can you afford

A key element to knowing how much your small business can afford comes down to understanding your cash flow. Cash flow is the money that comes in and goes out of your business. Typically small business owners are laser-focused on cash flow because it is what allows them to operate the business. While revenue and profit are important to track and improve upon, understanding daily cash flow is one of the most important things to keep a small business running.

Review your cash flow and determine how much of a monthly payment you can afford to pay monthly. Paying off your loans is beneficial to your small businesses’ credit score and ability to secure additional capital in the future.

Business plans

Business plans are important and writing an effective one can improve the chances of your loan application being approved. Some lenders might require one as part of the application process. Once your business plan is complete, you can adjust it for future loan applications.

A traditional business plan is in-depth and is what most lenders will be looking for as it provides a comprehensive view of your business and its capital needs. The components are as follows: an executive summary, company description, market analysis, organization and management, service or product line, marketing and sales, funding request, and financial projections.

For an in-depth look at business plans, please visit our article titled How to Write a Business Plan for a Loan Application.

Documentation

The documentation required for your first business loan will vary depending on the lender, the type of loan, the loan amount, the industry your small business is in, and your business history. For example, traditional financial services institutions like banks or credit unions typically require more documentation and have stricter eligibility requirements than an online lender. Here is a list of documentation that you might be asked to produce:

  • Bank statements: Bank statements show lenders how much cash you have on hand, your cash flow, and provide a general understanding of your business’s financial situation. You will need to produce bank statements for all of your business banking accounts. You will likely be asked to produce anywhere from 3 months to two years worth of bank statements depending on your situation.
  • Credit statements: As noted above, your credit score will be pulled so the lender can understand your debt-to-income ratio by analyzing your existing debt obligations. Good credit will result in a lower interest rate than if you have bad credit. Dun & Bradstreet, Experian, and Equifax are the business credit bureaus that generate business credit reports.
  • Tax returns: Likely two years of both corporate and personal income tax returns will be requested by the lender. The lender will use the tax returns to understand how much money you’re earning, the sources of income, and if it’s been consistent over the last few years.
  • Financial statements: Business financial statements such as a balance sheet, income statement, and statement of cash flow.
  • Business licenses: Depending on your industry, you might need a license to legally operate your business. 
  • Commercial leases: If your business currently rents out commercial space to operate, have terms of your lease available. 
  • Articles of incorporation: The lender will want to review the legal documents which detail how the small business was structured (i.e., LLC, LP, etc) and where it was incorporated.
  • Resume: For those with limited or no business history, a lender might want to review your resume to see if your experience will support your ability to operate a business. 
  • Business plan: See the section above titled, “Business Loans” for more information.
  • Financial forecasts: As an extension of your business plan, your financial forecasts will dive deeper into the market opportunity for your business and forecasted revenue. 
  • Financial statements: In addition to the financial statements listed in the bullet point above, you might also need to produce profit statements, loss statements, accounts receivable, etc. The lender will let you know if there are any additional statements.
  • Franchise documentation: If you are operating a franchise, the lender might ask for specialized documentation. For more information on franchises, please see our blog post Ways to Get a Business Loan for Opening a Franchise.

 If you have business partners or co-owners, they will likely need to produce the documents for their finances as well. 

Application process

Assuming you have all the required documentation gathered, the loan application process can move quickly depending on the lender. The steps below are general and might change depending on the lender, but as a first-time loan applicant, you can expect to encounter a loan application process that looks like this:

  1. Initial setup/profile: whether you’re using a traditional lender or an online lender, you will need to provide basic business information to help them understand your funding needs. 
  2. Submit Your Application: The lender will likely have a general questionnaire that goes beyond your profile setup in step 1 and then will provide a mechanism for you to provide business documentation. A secure online portal will give you the ability to submit your documents as PDFs or connect your business’s bank accounts.
  3. Review funding options: Once your documents have been securely uploaded/submitted to the lender, they will review and process them to provide your funding options. You can review your options and determine what you would like to move forward with.
  4. Underwriting to make final approval: The underwriting team – depending on the lender might be an actual team of humans or might be automated by software – will make the final approval determination.
  5. Receive funding: Depending on the lender, you might receive your funds via wire, ACH transfer, or physical check. 

The most important thing is to gather all of your documentation ahead of time before starting the application process. 

Business loan consultants

Business loan consultants are a fee-based service that can help a small business owner navigate the entire business loan process. Business loan consultants can:

  • identify the right loan product based on your business
  • streamline the entire loan process by gathering the right documents, preparing applications, submitting paperwork, and working directly with the lender on any follow-up questions
  • help prepare a business plan

For entrepreneurs whose most precious resource is time, or first-time borrowers who are overwhelmed with the application process, a business loan consultant can be worth the investment. For more information, read our article How to Find Business Loan Consultants Near Me.

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