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Applying for a first-time small business loan can provide the capital needed for a business to grow and thrive. It can give you the runway to build or expand your business without tying up large amounts of business revenue.
But before applying, you’ll want to have your business finances to determine funding amounts while considering the types of loans that best fit your business.
7 steps to get a first-time business loan
Understanding the basics of getting a first-time business loan can help you make the right decision when comparing and selecting a loan. Let’s run through the steps involved.
- Create a budget
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 and, in some instances, may provide rewards if you’re working with the same bank. Writing a business plan can also show the lender that you’ve done your due diligence with financial projections and strategies for business growth.
- Know how much funding you need
After crafting your business budget, you can see any cash shortfalls or upcoming purchases in which you might need a business loan. You can also get a quick financial overview to capitalize on a business opportunity or fund an emergency loan.
Knowing the exact amount that will cover the purchase and fit within your business budget will help you apply for the right amount of funding. 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.
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, monthly payment or annual percentage rate (APR).
- Check your credit
For a first-time business loan, lenders will likely use your personal credit history to see a record of how you manage bills and payments. Businesses will 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.
It will also help to check your credit scores before completing an application to give you an idea of what loans you qualify for.
- Determine what loan type may be best
Now that you know the expenses you need to cover and the funding amount, you’re set to compare business loans. Different types of business loans can serve specific purposes, and some loans tend toward stricter or more relaxed loan criteria.
