When you own a small business, there will be times when you need extra funds to keep the business afloat during quieter periods, purchase essential equipment, or buy more inventory ahead of a busy season. A business loan can provide small business owners with this crucial funding.
But if you’re getting a business loan for the first time, your mind may be filled with questions. How do business loans work, are there different options, and more importantly, what are the eligibility requirements? You’ll find the answers you seek in this guide to getting a business loan for the first time.
Steps to Procuring a Business Loan
Getting a business loan is simple and stress-free when you follow these steps.
1. Pick the Right Type of Business Loan for Your Needs
Getting a business loan may seem complicated, but it doesn’t have to be. Most business loans operate similarly to other types of loans.
There are different types of business loans and you need to decide which type is right for your needs. Examples include start-up capital, working capital loans, business auto loans lines of credit, and merchant cash advances, to name just a few.
Check each loan offer to see if the maximum loan amount covers your most urgent needs. Also check if there is an origination fee, if collateral is required, and whether a fixed or variable rate of interest applies.
Are you starting a retail business or expanding your small home-based business to its own premises? Perhaps you want to invest in a fleet of delivery vans for your growing manufacturing business. Whatever the case, there’s a business loan that’s right for you.
2. Determine Your Eligibility
When applying for a loan, you will have to meet certain criteria and supply supporting financial documents when you apply. If approved, you will repay the principal amount and any interest with monthly payments.
Regardless of who the lender is, or what the terms are, there will always be eligibility criteria to meet. These qualifying criteria generally include affordability, a good credit history, and a good credit score.
A low credit score or poor credit history is often a stumbling block to qualifying for a business loan. To illustrate this point further, we need to point out that there are two types of credit scores.
Your personal credit score relates to your personal credit usage and history. Your business is a separate entity. Its credit score relates to your business credit usage and history. The two will not necessarily be similar, nor will a low personal credit score necessarily impact your business credit score.
For a business loan, lenders typically check your business credit score. So, how do you get a small business loan if you’re a start-up with no business credit history? Your personal credit score will determine your eligibility in such a scenario.
3. Gather the Required Documents
Whatever type of business financing you require, you’ll need to provide supporting documents with your application. These are usually financial statements and business financial records. You may also have to provide proof of identity, address, business address, and social security number.
Businesses have their own identifying numbers too. This allows the IRS to identify business entities and ensures businesses comply with tax laws.
An Employer Identification Number (EIN) is required to open a business bank account at most financial institutions in the U.S. It also helps to establish business credit. You can apply to the IRS for an EIN.
4. Ask for Quotes on Small Business Loans
The secret to getting a business loan that works for you is choosing the most affordable option at the start. There are many different types of loans for small business use, and most have competitive interest rates.
But this is not true for all of them. This is why you should ask for quotes and compare lenders.
Be proactive. Make a short list of all the lenders who may offer the type of loan you need. Don’t take it for granted that your first application will be approved. Be ready with copies of your supporting documents should you need to apply to others on the list.
5. Apply for a Business Loan
Your next and final step is to apply for the loan.
Small business owners now have far more choices than traditional banks and credit unions. Various online lenders offer small business loans to first-time borrowers, even if they don’t have much credit history. Bear in mind that interest rates between such lenders can vary considerably.
Once you have submitted the completed application form and supporting documents, you must wait to hear if you’ve been approved. Online lenders often pay within 72 hours of approval, but banks can take longer.
Backing From the Government: The Small Business Administration
Even if you don’t meet the criteria for a traditional business loan, your quest for funding may not be an end yet. Need to know how to get a loan to start a business from the government? Here’s a quick breakdown.
The Small Business Administration (SBA) is a cabinet-level federal agency that helps small businesses. It offers small business financing through various SBA loans, even to those with a low business credit score.
The federal government backs most SBA loans. If you want to apply for one of the SBA-guaranteed loans, contact the Small Business Administration.
What to Do if You’re Rejected
Unfortunately, applying for a business loan is not always a successful endeavor. Often, this is because your credit history or credit score did not meet minimum requirements. Different lenders have different minimum requirements, so you may still be successful with a loan application at another lender.
You can also re-apply in the future, once your circumstances have changed. Remember that the better your business credit, the better your chances of being approved for a business loan. Check out our guide to establishing good business credit for helpful tips.
What can you do if your small business loan application is rejected and you need the funding now? Our next section will offer some alternatives.
Alternative Funding Options
A small business loan is not the only funding option for your business. Here are some alternative funding options for small businesses to consider.
Secure Venture Capital From Investors
Starting a business from scratch takes more than just hard work. It also takes a significant amount of funding. But you don’t have to go the conventional business loan route. You can secure funding from venture capitalists, and get that start-up capital you need.
Venture capitalists offer entrepreneurs and startup capital in exchange for equity in the business. So there are no loan repayments to worry about, but you’ll share the business profits with these investors.
Use Crowdfunding
Crowdfunding is another excellent source of alternative funding for small businesses.
Debt-based crowdfunding (also known as crowdlending), works much like a business loan, except the loan amount is obtained by pooling investors’ funds. Equity-based crowdfunding is similar to venture capitalism and offers larger donations in return for business equity.
Be sure to use only a reputable crowdfunding or crowdlending platform, to avoid being targeted by scammers.
Fund Your Business Yourself
If you’re concerned about the costs or criteria of getting a business loan, you could always fund your business yourself. That might seem impossible if your current savings account statement is less than desirable. But don’t worry, there are other ways to fund your business by yourself.
For example, you could take a 401 (k) loan. This allows you to access some of your retirement savings, tax-free. You can borrow up to $50,000 or 50% of your assets, whichever is the lesser amount.
If you’re starting an e-commerce venture, your savings or a 401(k) loan may be sufficient for the initial startup capital. But you could need extra funds later for extra cash flow or to grow your business. In such a case, a business line of credit from PayPal or an Amazon Seller Loan may be right for you.
Conclusion
Getting a business loan takes time and patience. You also have to meet specific eligibility factors. And if you are a new startup with no credit history, getting the funding you need can be even more difficult.
That’s why, when you’re getting a business loan for the first time, it helps to have expert advice and guidance. That’s what you get at E-Boost Partners. We make getting a business loan for the first time fast, simple, and convenient. Contact us today for more information.
FAQs
A small business loan amount can range from $15,000 to $1 million. That said, maximum loan amounts differ from one financial institution to the next. Whether yours is a first-time business loan application or not, your credit history, credit score, and affordability will affect how much you can borrow.
Interest rates vary by lender and loan type and are influenced by credit score and credit history. Typically, short-term loans, and loans for bad credit, have higher interest rates. When shopping for business loans, compare the annual percentage rate (APR) because this includes all fees, not just interest.
Yes, you can, but it depends on the type of loan you took. Some business loans require collateral, and this is where the risk of loss of assets comes in. Remember that even if your business fails, you must repay the loan.
