First-Time Business Loans
When you launch a small business, you may have raised funds from friends and family, saved for years, or used personal funds to get going. But, as your business grows, it is likely that you will need to borrow money along the way.
It is the rare business that is able to generate enough capital from operations to expand, grow, or take advantage of business opportunities. Small business loans are often needed to reach the next stage of your business’ development, but if you have never taken out a loan before you might not know where to start.
Shield Funding understands that all business owners need an opportunity when they submit their first application for a business loan. The process is fast and flexible so you can get approved quickly even if you have bad credit. Get started today with our online application. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What are First Time Business Loans?
The process of applying and getting approved for a first-time business loan can be confusing and eye-opening. Traditional lenders will request business plans, financial statements, and other finance and accounting documents that you might never have prepared before.
Without being able to reference a past history of borrowing and repaying loans, your lender is taking a higher risk. When lenders extend credit, they both make their profit and protect themselves from risk through the fees and interest they charge. As a first-time borrower, you are higher risk, so your first loan will likely have the following characteristics:
- Higher interest rates than less risky borrowers
- More fees
- A possible requirement to pay interest up-front
- Shorter repayment period
The higher interest rates guards against risk, and the fees ensure that you are serious about taking out a loan. Lenders ask for points, or interest paid at the loan’s origination, to hedge risk and protect their profit. They are often not comfortable waiting a longer time to be repaid, either.
Your cost of capital will be higher than a traditional, fixed-rate business loan,
Can I Get a First Time Business Loan from a Bank?
Banks are cautious about lending to first-time borrowers. Whether or not you can obtain a first-time business loan from a bank will depend on your credit score and how long you have been in business.
Typically, you need to meet the following to qualify for a bank loan;
- A credit score above 680.
- Been in business longer than two years.
- Strong monthly and annual cash flows.
Those are the minimum qualifications, but they could also request two years of tax returns, bank statements, financial statements, a business plan, and more. As a first time borrower, you might not need meet some of these qualifications. However, banks also offer loans through the Small Business Administration or SBA.
The government guarantees a portion of SBA loans, thus mitigating the risk to the bank. Because of the government guarantee, the requirements are lower. You might have to provide collateral or a personal guarantee, however.
To borrow from a bank, you have to clear high hurdles that may be insurmountable for many business owners. Alternative lenders and other lending options identified a need in the marketplace for more accessible funding.
Types of First Time Business Loans
First time business loans may not be fixed-rate, term loans, but alternative forms of capital. This is not a bad thing, as many of these other ways to access capital can have quicker approval terms and more flexible terms than a term loan.
Bad Credit Business Loans
Alternative lenders are willing to take more risks than traditional lenders. Their products are geared to those who may not have bad credit, per see, but other factors which disqualify them for a bank loan.
Bad credit business loans can be approved in just 24 hours, and you could see the loan’s funds in your bank account within a few days. This makes them an excellent choice if you did not realize you would need capital and are now scrambling to find funding.
Lending decisions are made based on annual revenues and your time in business, which can be as little as two months. If you have a credit score above 500 and your business generates $8,000 of monthly revenues you probably will not encounter any issues.
Alternative lenders fund business loans in amounts between $5,000 to $1 million. Unless it is an extremely high value loan the lender will not request tax returns or bank statements. Bad credit business loans require much less documentation than a loan through a traditional lender.
Due to the shorter approval time, which gives them less time to verify your credit-worthiness, alternative lenders charge higher interest rates to cover their risk. Your interest rate or fee structure on a bad credit business loan will range from 12% to 45%, but it could still be lower than other business funding avenues. If you have a higher credit score, the interest rate could be comparable or less than a business credit card or merchant cash advance.
Alternative lenders who offer these loans know that business owners could need capital, and be credit-worthy, before they meet a bank’s requirements. They are an accessible funding source for a first time business loan.
Short Term Business Loans from Alternative Lenders
A short term business loan has a repayment period of no longer than two years. If it is a fixed-rate loan the payment will not vary and you will be able to budget repayment for the future. Short term lenders lend smaller amounts of capital to reduce their risk, but if you only need a few thousand dollars they could be a good choice.
A condensed repayment period minimizes the risk of non-payment, but it also leads to a higher monthly payment. For example, a $10,000 loan repaid over six years has monthly payments of $138, but repaid over three years the payment jumps to $276. Before applying for a short-term business loan, calculate your free cash flow and check your budget to determine if you can afford the payments.
While collecting your information and completing your application, you and the lender will establish a repayment plan of monthly, bi-weekly, weekly, or even daily payments. Generally, they prefer to deduct their payments automatically from your bank account.
Business Credit Cards
Opening a credit card could be a great way to fund your business needs. It is easier to be approved for a credit card than a fixed-rate, term loan, and they offer the convenience of being able to pay them down and then access the freed up capital.
They do, however, charge extremely high interest rates. The lowest rate starts around 14.49% and can go all the way up to 26.99%. Many will raise your rate if you miss a payment or pay late. Without excellent credit your interest rate will be at the higher end, and is likely to be more than the rate you would get on a bad credit business loan.
What is more, small business owners with credit scores below 690 might not be approved for a business credit card at all. If you apply at the same lender where you bank, you might have a better chance based on your existing relationship. When deciding whether or not to go this route, keep in mind that the credit limit on a business credit card might not be high enough to satisfy your business need, and if you immediately borrow up to the limit it will further hurt your credit score.
Business Lines of Credit
A business line of credit is similar to a credit card in that the line remains open and the capital ready to access whenever you need it. Lines of credit can remain open for one or more years, but will freeze and convert to a term loan at some point.
You will only have to make a payment or pay interest if you draw on the line, though the lender may charge an annual fee to keep it open. Some lenders will also charge a draw fee every time you take out cash.
Approval times and limits vary depending on your past relationship with the lender, credit score, and banking history.
Merchant Cash Advances
A merchant cash advance or MCA is another option for a first time business loan. You borrow money against projected future sales. While the lender will want to see credit card or bank statements to prove your past receipts and project future cash flows, all that really matters to them is how much money you have coming into the business.
Merchant cash advances can be approved and funded in quick time period, there is no lengthy loan application and often your credit is not even checked. All you might have to do is give the lender your business name, address, and some bank statements.
You do not repay a MCA through a set monthly payment, as with a term loan. Instead, the lender deducts a percentage of your credit card sales going forward. This deduction repays both their profit and the capital they lent to you. If you have bad credit and the only business credit card for which you can be approved has a high rate, the rate on a MCA, which start at 15%, could be much less. MCA rates can go up to the triple digits, however, if it is taking you too long to repay the lender.
If the bulk of your customers pay by credit card, look into a MCA. But be sure to compare its rates and terms with other lender options before making your final borrowing decision.
Invoice Factoring and Financing
It can be difficult for small business owners to stay on top of collecting on past due invoices. A large balance of outstanding invoices may be the reason you think you need access to capital, but they could also provide you with the loan you need to make it through a cash flow slump.
Invoice financing and factoring exists to help business owners in this exact position; you are borrowing against or selling your past due receivables to get immediate cash. Invoice financing lenders allow you to pledge the value of your past due receivables to the lender. Your personal credit is not considered, though the lender may want to check your customers’ credit. They hold back a reserve from advanced funds to protect them from customers who will never pay. The amount they advance after this reserve could be 80-85% of the total invoices, or much lower.
An invoice factoring company buys the invoices at a discount and goes to your customers to collect on the past due balances. You have no further involvement with them.
Be careful when selecting a accounts receivable financing company. If they are aggressive and rude when collecting on your invoices, they could hurt long-term customer relationships.
How to Find the Best First Time Business Loan
If you have never borrowed before, do not be shy about asking questions. A reputable lender will want to support a successful borrowing experience for all concerned.
Always ask about fees and prepayment penalties. This will help you compare lenders. If one lender charges significant fees or interest at origination and another lender does not or has lower fees, the second lender could save you money.
The APR, or annual percentage rate, blends together both the simple interest and fees to more accurately present your cost of capital. Ask your lender to provide you with this percentage. While on the surface two lenders may have the same rate, the APR may make it obvious that one is a better choice.
Lenders charge prepayment penalties if you pay off a loan early to make up for the lost interest and profit they would have made if you had paid over the loan’s entire term. If you hope to or plan on paying off your loan early, you will want to avoid prepayment penalties.
Shield Funding does not charge prepayment penalties, and after ten years in business is accustomed to working with first time borrowers.
Improving the Odds for a First Time Business Loan
Now that you have learned what lenders look for in a first time borrower, you might be wondering if you can improve your odds of being approved for a loan. If you can raise your credit score or monthly revenues, you will pay less in interest and fees. Unless you have an immediate need for the loan, take the time to improve your odds before applying.
Work on Your Credit Score
A higher score never hurts when applying for capital, and lowers your cost of capital. If you are newer in business, you might not have known its importance before you needed to access capital.
Your credit score drops lower if you make a late payment on any form of open credit, such as a credit card or car loan, or miss a payment altogether. While you might be able to get a creditor to remove a late payment from your account if you call and ask, you should set up auto-pay for all your bills in the future to avoid this happening again.
Your debt service ratio, expressed as your monthly debt service payments divided by your net income, also impacts your credit score. It reflects how much of your cash flow must be used to make payments on debt. Paying down balances on credit cards, loans and lines of credit improves your credit score.
Read our bad credit repair guide if you want to learn more about improving your credit score.
Grow Your Monthly Revenues
Alternative lenders look at monthly revenues during their underwriting process. The higher your revenues, the higher the loan amount that they will approve and the lower interest rate that you will pay.
Try increasing your marketing efforts, whether through social media or postcards to local businesses, to grow revenue. Ask current customers to write online reviews, or if they have anyone in their network who could use your services.
Brainstorm with a business mentor for methods to generate more revenues before you apply for capital and you could improve your odds of getting that first time business loan.
The Final Word on First Time Business Loans
Your first time borrowing capital can be slightly overwhelming. There is a lot to consider when making a borrowing decision. Know that a reputable lender will not approve you for a loan that they do not have confidence you can repay, and take strength from their confidence in your business.
Alternative lenders fill the gaps left by traditional lenders who are often unwilling to work with first time borrowers. Reach out to Shield Funding today to find out more about your options as a first time borrower.