As a first-time business owner, a small business loan can provide the capital you need to grow and thrive. Around 16.5 percent of small businesses use business loans from banks or other financial institutions to get their business off the ground and support operations.

The newer your business is, the trickier it can be to get financing. So, as a startup, it’s vital to be prepared by considering the types of loans that best fit your business’s needs and the requirements of each type.

Let’s walk through the steps to getting a first-time business loan, from understanding how much funding you can afford to choosing and applying with a lender.

1. Create a budget and business plan

For most business loans, lenders will ask about your business’s financial state to determine its ability to repay the loan. That means you need to properly track and document revenue and expenses, including all income streams and recurring and one-off expenses.

Many lenders will want to verify cash flow through bank statements. While not all lenders require a business-specific account, having a business checking account can help. In some instances, a business checking account may help you get your loan approved if you already have a checking account with the same bank.

If you’re a first-time business owner or you own a startup, some lenders may also require you to submit a business plan. A business plan details your financial projections for the next year or several years and outlines the steps you’re going to take to achieve your goals. It can show the lender that you’ve done your due diligence to make your business profitable and able to sustain the business loan.

2. Know how much funding you need

After crafting your business budget, you can see any cash shortfalls or upcoming purchases for which you might need a business loan. You’ll want to settle on an exact number that will cover the amount of the purchase or cash shortage. 

This  will help you determine how much funding you need  for a startup business loan. Make sure that your business can manage the loan repayments by estimating the business loan’s cost ahead of time.

Lenders will assess your business’s debt using the debt-to-income ratio or debt service coverage ratio. Both ratios consider your business’s debt compared to revenue to gauge whether your business can handle repayments.

Look at total costs

Consider the total borrowing cost of each loan over the loan’s lifespan, including the total interest paid and fees. Business lenders often charge interest and fees in multiple ways, such as an origination fee, service fee or annual percentage rate (APR).

3. Check your credit

For your first  business loan, lenders will likely use your personal credit history to see a record of how you manage bills and payments. Businesses will generally benefit from having a strong personal credit score of 670 or higher, especially those that haven’t been in business long. Lenders may also require a personal guarantee, which is a written statement guaranteeing the loan with personal assets.

Lenders may also check your business credit score if you’ve established business credit. If you haven’t, applying for a business credit card or buying inventory on vendor credit can be good starting points to building business credit.

You’ll want to check your credit scores before applying for business loans. That way you know which loans you qualify for. Many lenders will post their minimum credit scores accepted on their websites, helping you only apply for loans you’re likely to get.

4. Determine what loan type may be best

Now that you know how much funding  you need to cover expenses, you’re ready to compare business loans. Different types of business loans work best for different situations, and some loans have more lenient requirements than others. 

When comparing loans, consider each loan’s features to find the right one for your business. Those include the minimum and maximum loan amounts, interest rates and fees, all of which contribute to the loan’s borrowing costs.

You should also consider the length of payment terms offered. Long terms can lower monthly payments and interest rates. Short terms can help you get out of debt quickly and lower the total interest paid. These features may steer you toward one type of loan over the other.

Bankrate insight: Interest rate discounts for business loans

Interest rate discounts are rare, but offered by some lenders like Bank of America. For example, Bank of America offers discounts of 0.25 percent to 0.75 percent, if you qualify for its Preferred Rewards for Business.

To qualify for its Gold tier, you need at least $20,000 as your three-month combined daily average balance. Interest rate discounts go up as you qualify for higher tiers with higher daily average balances.

Benefits of business lines of credit for a first business loan 

While you can apply for nearly any type of loan, lines of credit work well as a loan for first-time business owners for several reasons:

• Lenient eligibility criteria. Lenders may accept business owners with less time in business or a lower credit score than other types of business loans.
• Can draw from the line of credit during the draw period. You’re approved for a specific amount, and you can draw up to that amount at any time during the draw period to pay for expenses.
• Can reuse the credit in the future as needed. Unlike business loans, lines of credit allow you to access the credit again in the future. Your credit limit replenishes as you pay back previous loans.
• Only pay interest on what you borrow. You won’t pay interest on amounts you don’t use – you only pay on what you withdraw from the line of credit.
• Earn rewards. Some lenders like Wells Fargo offer lines of credit designed for specific borrowers like its Small Business Advantage line of credit for first-time business owners. You can even earn points for every dollar you spend and redeem them for travel, gift cards or statement credits.

Alternatives to business loans

If you can’t qualify for a traditional business loan, you may want to consider these zero-debt financing options:

• Business credit cards allow you to charge purchases up to  a specific credit limit, and you can use it for purchases anytime you need it. A card can also help manage cash flow and expenses.
• Business grants are like the scholarships of the business world. They offer money to qualifying businesses that the business doesn’t have to repay. Each grant has qualifications, including requiring a business plan or presentation about your business.
• Crowdfunding allows businesses to raise funding through multiple individual investors, either as a donation or in exchange for a reward or equity in your business. Some crowdfunding campaigns can even act as a business loan. 

5. Compare lenders

Next, consider the best lenders offering the type of business loan you’re looking for. Every lender offers different benefits and loan features that can fit your business’s needs.  

For example, some lenders specialize in short-term loans. Others are known for their prepayment discounts or low interest rates. Compare several lenders and loan offers together to see which ones best fit the purpose of your financing.

Banks

Traditional lenders like major banks and credit unions often offer competitive interest rates on business loans. Many also carry a variety of business loan types to serve you the one that best fits your needs. Plus, you can meet with a loan specialist in person to ask questions before and during the application process.

However, traditional lenders tend to be strict on which businesses they will approve. For example, most will require a minimum credit score around 670 or higher to qualify. 

In addition, expect an in-depth application process requiring detailed financial documents to prove that you can repay the loan. In short, first-time business owners may have difficulty receiving a business loan from these lenders, unless you have solid business financials.

Online lenders

Online lenders, also known as fintech or nonbank lenders, are available to borrowers who may not meet traditional lending requirements. These lenders may specialize in specific types of loans or serve startups or bad credit businesses.

Most of the loan application process is online so that you can apply within minutes. Many online lenders will approve the loan in a day or two. But it may take longer to deposit the funds in your account.

SBA

If you don’t qualify for a conventional business loan, first-time business owners  could look into a loan backed by the Small Business Administration (SBA). SBA loans are offered through approved SBA lenders, often major banks. They are partially guaranteed by the SBA, meaning that the SBA will pay back a portion of the loan if you default.

The SBA sets a maximum interest rate that lenders can charge, offering competitive interest rates especially for a first business loan. These loans also offer long repayment terms, helping to make repayments affordable. 

You can find approved lenders using the SBA Lender Match tool. In 2024, 15.5 percent of SBA loans were granted to brand-new startups, and another 16.7 percent went to businesses under two years old.

Microloans

Microloans are small business loans offered in small loan sizes, such as $100,000 or less. No standardized amount defines a conventional microloan, but SBA microloans are capped at $50,000.

Because microlenders often lower the lending criteria, startups and companies with limited sales revenue may qualify for these loans. SBA microloans are offered through approved SBA microlenders, often nonprofits geared toward serving a minority community.

6. Gather the necessary information and documents

The exact documents required for a startup loan will differ from lender to lender, but common requests — especially for traditional bank lenders — are:

• Business and personal credit history
• Business and personal income tax returns
• Business bank statements
• Business licenses and registration
• Business plan
• Collateral offered
• Employer Identification Number (EIN)
• Financial statements such as a balance sheet
• Funding request
• Personal bank statements (if business statements aren’t available)
• Personal identification information
• Proof of business formation

7. Apply for your first business loan

Once you’ve chosen your loan and gathered all the documents, you can submit your loan application to the lender. Some lenders will require you to submit paperwork in person, while others have an online application.

Submitting the paperwork doesn’t mean the loan application is totally out of your hands. You’ll want to keep an eye out for messages from the lender in case additional information is needed. Responding to these requests quickly will keep the approval process moving efficiently.

In most cases, the approval process will take a few days to several weeks, but the type of loan and lender you choose will influence how long it’ll take to receive funds.

8. Review the loan agreement: What to look for

Once you’re approved for your first business loan, the lender will present you with a loan agreement that you will sign. Before signing, you’ll want to:

1. Read the fine print. Make sure you read through the loan agreement and fine print carefully as this document is legally binding and can affect your personal finances.
2. Notice interest rates and fees. Note all the costs involved with signing for this business loan, including the interest rate, all fees charged and the total cost of the loan. You want to be well prepared for any fees it charges up front and throughout the life of the loan.
3. Note how it handles missed payments and loan default. If you manage your business loan well, you won’t have to worry about loan default. But it’s a good idea to understand what actions the lender will take if you miss payments.
4. Ask the lender questions. If you don’t understand a point in the loan agreement, take time to ask the lender to clarify. You want to havce full understanding of what you’re signing.

Bottom line

For some small business owners, getting a first business loan is essential to growing the business and scaling quickly . But as with all loans, you’ll want to compare types of loans and lenders and become familiar with the lender requirements. Gaining that knowledge will help to ensure you have what you need for approval and can get the right small business loan for your needs.

Frequently asked questions

• What do you need for a first-time business loan?
  

  Business loan requirements for a first-time business owner vary depending on the lender and loan type. Traditional lenders want strong personal or business credit and steady revenue, while online lenders may accept fair or bad credit and low revenue. You may also need to back the loan with collateral or a personal guarantee, which guarantees the loan with personal assets.

• Is it hard to get your first business loan?
  

  Getting a  business loan as a first-time business ownere can be difficult  because lenders often want to see strong revenue, credit history and time in business.

  However, startups and low-revenue businesses can find  financing through alternative loans like invoice financing or merchant cash advances. Startups can also seek out lenders with lenient loan criteria that will accept them, such as online lenders.

   

• Do banks give startup business loans?
  

  Yes, banks do offer startup business loans, although not every bank will accept new businesses. When comparing loans, look for lenders that accept little time in business. You’ll also need to match the lender’s other requirements, like revenue and credit score.

  Looking for a startup SBA loan may improve your chances of approval since the Small Business Administration partially backs the loan.

• What is the easiest business loan to get?
  

  Business lines of credit are often easier to qualify for than other business loans, especially for first-time business owners. Alternative loans like invoice factoring and merchant cash advances also have lenient criteria for approval. However, conventional business loans may be easy to get if you have strong credit and business and personal finances.