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All About Getting a First-Time Business Loan

All About Getting a First Time Business Loan; Applying for a first-time business loan requires a good credit score, proof of finances (bank statements, tax returns, etc) and more.
Kevin Brouillard
Kevin BrouillardUpdated April 22, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Many business owners use financing at some point, whether it’s to help them launch their companies or to fund expansion further down the line. No matter what stage your business is at, however, applying for your first business loan can feel overwhelming and intimidating. You not only need to not choose a lender and loan type, but also navigate the application process and meet the necessary qualifications. While there’s no one-size-fits-all solution to getting a first-time business loan, this guide will break down what kinds of funding you may want to consider, where to find a first-time business loan, and what you can expect during the loan application process. 

How Do You Apply for a First-Time Business Loan?

There are many different kinds of small business loans and the application process can vary somewhat for each one. However, here are some basic steps that can help you find and apply for the right small business loan.

Checking Your Credit Score

Before choosing a lender and submitting a loan application, it’s a good idea to find out where your credit stands. Your credit score is one of several factors that lenders consider when assessing how risky you are as a potential borrower. From the lender’s perspective, a borrower with poor credit has a higher risk of defaulting on loan repayments. For a first-time business loan application, a lender may look at your personal rather than your business credit score (which you may not have established yet). Ranges vary depending on the credit scoring model, but generally fall between 300 and 850. A credit score of 700 or above is usually considered good, while a score over 800 is considered excellent. Credit scores are calculated from your payment history, credit usage, length of credit history,  and recent credit history (such as applying for new accounts).Many lenders post what credit scores are required for their products. Sometimes a low credit score can cause a lender to reject your loan application. In other cases, first-time borrowers with poor credit scores may have to make larger down payments, sign a personal guarantee, or put up more collateral to be approved. Checking your credit score may help you get a sense of how a potential lender might see you and what kind of funding issues you may encounter.If you need a business loan for the first time and your business lacks credit history, there are some things you can do to establish a business credit score. Getting a business credit card and maintaining a successful record of paying it off each month is one strategy that can help you build credit over time.

Figuring Out How Much Money to Apply For

When you’re applying for a first-time business loan, it can be helpful to identify how much money you need to start your business and what the funds will be used for. Being able to provide justification for the amount you are requesting can improve your chances for loan approval. For example, obtaining price quotes for new equipment or providing comparable listings for a real estate purchase can demonstrate your preparedness as a first-time business owner and/or borrower, as well as justify your need.

Debt-Service Coverage Ratio (DSCR) and How to Calculate It

The debt-service coverage ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. Knowing what yours is can help you assess how much debt you want to take on. Lenders may also weigh your business’s DSCR as they make their decisions about offering financing.DSCR is calculated by dividing the sum of a business’s earnings (before interest, taxes, depreciation, and amortization) by its current and proposed debt obligations. Even if this is your first time getting a loan, you may have short-term debt to factor in, such as rental agreements or outstanding credit card payments. Borrowers may need a minimum DSCR to receive a loan. The threshold can vary by lender, requested amount, and current economic conditions. Generally, however, a DSCR below 1 indicates that a business might not be able to cover its debt payments in full. Therefore, applicants may need a DSCR above 1 to qualify for a first-time business loan. 

Gathering Documentation

The paperwork you need to submit for a first-time business loan will depend on the type of loan, lender, and amount requested. In many cases, however, you need to provide:
  • Business licenses and registration
  • Commercial lease agreement
  • Business plan
  • Up to one year of business bank statements 
  • Personal and business tax returns from the most recent three years 
  • Business financial statements
  • List of current accounts receivable 
  • Schedule of business debts
  • Proof of collateral

Types of First-Time Business Loans

Different types of business loans have different requirements, repayment terms, interest rates, and conditions. Here’s an overview of some leading options for first-time small business loans. 

Bank Loans

Regardless of the age of your business, seeking a loan from a bank or credit union you already have an account with can be a logical place to start. Bank loans can come in various forms, including term loans and business lines of credit. Term loans give businesses a lump sum that is repaid (plus interest) over a designated period of time (known as the term). Generally, repayment is on a monthly basis. Term lengths can range from several months to multiple years. A business line of credit provides access to a set credit limit. You can draw what you need when you need it and only pay interest on the amount you borrow. As you repay what you borrow, the funds become available to borrow again. Both options can offer businesses some flexibility as to how they spend their financing. This may be advantageous for businesses with a wide range of operational and/or startup needs.Banks often offer the best interest rates on business loans. However, they generally have strict qualification requirements, such as at least two years of business history, excellent credit, and a minimum amount of annual business revenue.

SBA Loans

SBA loans are business loans that are partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, which can be banks or online lenders. Because the government will cover a large portion of the loan in the event of default, SBA loans represent less risk to lenders. As a result, you may have better luck qualifying for an SBA loan than a traditional bank loan. SBA loans break out into four categories: 
  • 7(a) loans The most common SBA loan, 7(a) loans can be an ideal option for business financing due to their long repayment terms and low interest rates. Plus, 7(a) loans can be used for a variety of purposes, including working capital, business expansions, or purchasing equipment and supplies. The maximum loan is $5 million.
  • 504 loans These SBA loans offer affordable financing for large equipment or real estate-related purchases. Terms can be as long as 25 years with maximum loan amounts up to $5.5 million. 
  • Microloans These small loans (up to $50,000) are targeted specifically to startups. The SBA microloan program is fully funded by the SBA and administered by an intermediary network of nonprofit community-based lenders, rather than traditional banks.
  • Disaster loans These low-interest loans provide up to $2 million to assist small businesses that have been negatively impacted by a declared disaster. 
Getting an SBA loan is typically a time- and work-intensive process. However, it can be worth the effort due to their high loan amounts and favorable interest rates and terms.Recommended: SBA 504 vs. 7(a) Loans: What's the Difference?

Business Acquisition Loans

Not every first-time business owner is starting from scratch. Purchasing an existing business may eliminate startup costs and allow for quicker cash flow. A business acquisition loan is a tool for doing just that. Potential lenders will likely consider the existing business’s financial performance, as well as the applicant’s finances and proposed plan for the business under new ownership. 

Invoice Financing

If your business is already serving customers, invoice financing can be a way to get a cash advance to tackle pressing needs. With this type of financing, you use your outstanding customer invoices as collateral for a loan. Typically, the lender will advance a large percentage of your unpaid invoice amount — potentially as much as 90%. When your customer pays the invoice, you receive the remaining percentage, minus the company’s fees.You’re still responsible for collecting payment from your customers unless you choose invoice factoring, a form of invoice financing in which the invoices are sold outright to a factoring company. Because your invoices serve as collateral, invoice financing can be easier to qualify for than other small business loans. However, borrowing costs tend to be higher than other financing options.

Equipment Financing

Purchasing equipment can be a significant cost for starting, maintaining, or expanding a business. Equipment financing is a type of loan that lets business owners make these essential, but costly, purchases without depleting their savings. You can use an equipment loan for anything from office furniture to medical equipment to farm machinery. Typically the equipment itself serves as collateral for the loan.Equipment loans are provided by banks, SBA lenders, and equipment finance companies that focus solely on this type of small business loan. Depending on what you want to purchase and your company’s qualifications, you may be able to get an equipment loan that covers up to 100% of the value of the equipment you’re looking to purchase. You repay the loan over time, with interest.

Alternatives to First-Time Small Business Loans

If your business is still a startup, you may face difficulties obtaining traditional funding. But there are still more options you could consider.
  • Personal loans for business These are traditional loans that you may be able to get as an individual. Not all lenders will allow you to use a personal loan for business use, so it’s important to check before you apply. And note that, while paying your installments promptly for a personal loan may help your personal credit, it won’t help your business establish an independent credit history.
  • Crowdfunding For this funding option, you set a monetary goal and create a marketing campaign to solicit funds online through a crowdfunding site. With rewards-based crowdfunding, people contribute to your project or business and get a gift or reward in return. Crowdfunding can help you raise excitement about your business and test the waters to see how interested people are in your idea. However, it can take a fair amount of time and effort to run a successful crowdfunding campaign.
  • Loans from family and friends Supportive friends and family members may be willing to loan you small amounts of money to help you get your business up and running. If you go this route, it can be a good idea to write up a promissory note so the amount of the loan and terms of repayment are clear, and there are no misunderstandings that could jeopardize your relationship.
Recommended: Guide to Regulation Crowdfunding

Comparing Loan Options

The number of options for financing a business can seem overwhelming. Assessing your particular business needs and financial situation can help jump- start the process. If you’re ready to apply for a first-time business loan, Lantern by SoFi can help. With our online debt financing marketplace, you can search for small business loan options without scouring the web and checking multiple sites. With one short application, you’ll be matched with a loan offer that meets your company’s needs and qualifications.Let Lantern help you find the right financing solution for your small business.

Frequently Asked Questions

How does someone get a loan for the first time?
How much can you borrow to start a business?
What is a first-time business loan?
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About the Author

Kevin Brouillard

Kevin Brouillard

Kevin Brouillard is a Returned Peace Corps Volunteer, educator, and personal finance writer. His work has appeared in online publications such as Earth Island Journal, Jetsetter, Oyster.com, and Tripsavvy. Kevin covers an array of financial topics for SoFi, including loans for students and small businesses.
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