Your small business has not only survived its first two years, but it’s also thrived, thanks to your hard work and dedication. Now that your business has a few prosperous years behind it, the good news is that you may be eligible for financing from either banks or alternative lenders.   

This means you no longer have to rely on personal assets, high-interest credit cards or loans that involve a personal risk — such as a home equity loan — to support your business. With access to lower interest rate financing now available, you have the opportunity to obtain the financing you need for your business.  

A small business loan can enable you to grow your business by funding the purchase of new equipment, acquiring another business, hiring new or additional employees, or expanding your space and inventory. There are several options to consider when choosing your first business loan and lender. Different types of financing serve different purposes, so it’s important to understand your options before applying for a loan. 

Where Do I Apply for a Small Business Loan? 

If you’re new to small business financing, the first thing to know is that the main types of lenders that offer small business loans are traditional banks, credit unions and alternative (online) lenders. Each has its own advantages and drawbacks, depending on specific factors such as your FICO score, business credit rating, how quickly you need funding and how much financing you need.  

• Traditional banks and credit unions include local banks and branches of larger financial institutions with brick-and-mortar locations. They offer face-to-face service with small business lending officers and often offer loans with lower interest rates than alternative lenders. However, to qualify for a loan, these institutions typically require an excellent credit score and more paperwork than an alternative lender. In some cases, even once you’ve been approved for financing, it can take longer to receive the funding.  

• Alternative lenders operate almost exclusively online and generally charge higher interest rates on loans and other financing products than traditional banks and credit unions. However, what you get with an alternative lender is convenience — they typically accept lower credit scores, require less paperwork and provide quicker access to funding once you’ve been approved. Over the past decade and a half, alternative lenders have become well-established and reputable sources of small business financing. 

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What Steps Should You Take Before Applying for a Business Loan? 

When applying for a business loan — especially if it’s your first — it’s important to evaluate key factors about your business to gauge your chances of approval. Banks, credit unions and alternative lenders will all assess the risk of default when considering whether to grant you a loan or another financing product. Being well prepared can make the process smoother and increase your likelihood of success. Here are five steps to take to prepare for a business loan application. 

1. Check and Improve Your Credit Rating 

Both your FICO and business credit scores are among the most important indicators lenders will look at when deciding whether to give you financing. You can check your FICO score for free through any of the three major credit bureaus — Experian, Equifax and TransUnion. To check your business credit score, use the leading business credit bureau Dun & Bradstreet. 

If your scores aren’t where they need to be, consider taking the following steps: 

• Ensuring you have at least six months of on-time payments towards any outstanding debt.  

• Taking out (but not using) a business or personal credit card to increase your debt-to-credit ratio. Keep in mind, though, that this strategy can take several months to positively affect your credit score, and a new credit inquiry could cause a temporary dip in your credit score. 

• Requesting trade references from your suppliers if your small business regularly purchases inventory.  

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2. Define Your Reason for Taking a Loan 

When applying for any type of term loan, including US Small Business Administration (SBA) 7(a) loans, it’s essential to clearly state how you plan to use the loan to increase your revenue. It could be that you want to grow your business by hiring additional staff, opening a new location, acquiring a similar business or developing and marketing a new product. Lenders want to know that the loan will be used for legitimate business purposes that will help you repay it.  

3. Get Your Paperwork in Order 

Lenders will require you to present documents to prove your identity and confirm your business exists. This includes government-issued identification, Social Security number, tax returns and identification and documents proving that your business is registered as an LLC, S-, L- or C-Corp. Lenders will also want to review your business’ financial statements, such as recent bank records.  

4. Ensure You Have a Strong Cash Flow 

Lenders will assess your ability to pay back a loan by examining your business’ cash flow, which is essentially your business’ income minus its expenses. Having a consistent, positive cash flow is often crucial in getting approved for most types of finances, as that shows lenders that you have the ability to meet repayment terms. If you have periods of negative cash flow, you may want to hold off on applying for financing until you can demonstrate that your business is consistently turning a profit.  

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5. Ensure You Have Adequate Revenue 

Most traditional banks, credit unions and alternative lenders require a minimum annual revenue before considering your business for financing. It’s important to make sure your business has reached an adequate size before applying for your first loan. Some lenders require as little as $250,000 in annual revenue. 

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What are the Types of First Time Loans? 

First time small business borrowers often consider bank loans as their first option when it comes to borrowing. While a bank loan might seem like an obvious choice, several other loan types may better suit your specific needs. Here’s an overview of the most common loan options:

• SBA 7(a) Loan: This is a term loan offered by authorized lenders and guaranteed, in part, by the SBA. Like any term loan, an SBA 7(a) loan will provide you with a lump sum to be paid back over time at a fixed interest rate. This type of loan often offers a lower interest rate than a conventional bank loan. The size of SBA 7(a) loans varies. While they can be up to $5 million for well-established small businesses, the average size of an SBA 7(a) loan in 2024 was $443,000.  

Securing an SBA 7(a) loan can be challenging, however, due to its complicated application process and strict requirements. Applicants typically need a FICO score of 680–700, a business credit score of at least 80, a strong business plan, and a favorable business location. Additionally, if approved, funding for the loan can take several weeks.  

• Bank Loan: This is a term loan that typically charges interest rates than a SBA 7(a) loan. Traditional banks and credit unions often charge lower rates than alternative lenders but may have more requirements, including a business plan and, if your credit score is less than excellent, collateral or a personal guarantee. Alternative lenders, while charging slightly higher rates, usually require far less paperwork and accept lower credit scores — typically a 650–680 FICO score and a business credit score of 70. With an alternative lender, you can also receive your funds in as little as 24 hours. 
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• A Business Line of Credit: A business line of credit is technically not a loan, rather, it is a flexible financing tool offered by traditional banks, credit unions and alternative lenders. A line of credit offers your business a pre-established credit limit that you can spend on whatever business needs you see fit. If you’re a first-time borrower, a business line of credit offers flexible funding to help manage your cash flow and cover expenses, such as payroll, adding new office equipment or renovating your business space.  

To qualify, you typically require a good credit rating. Interest rates are usually much lower than with credit cards, and you’ll only pay interest on what you draw. But it’s important to note that a business line of credit is not the same thing as a credit card. Unlike credits cards, a business line of credit won’t allow you to keep revolving debt for an indefinite period of time. A line of credit has an initial end date, and in some instances, the amount drawn must be paid back in full.  

A business line of credit can be either secured or unsecured, and different lenders have different eligibility requirements. Speak to your potential lender to understand the specific requirements and terms for obtaining a business line of credit. 

More >> How can a business line of credit help your small business?  

• Equipment Financing or Leasing: If you’re borrowing for the first time and need a new piece of equipment (including a vehicle) to maintain or grow your business but lack the funds for a down payment or don’t qualify for dealer financing, equipment financing could be a good solution for you. For example, if you own an agricultural business and need a new tractor or other manufacturing equipment, an equipment financing arrangement provides a lump sum to purchase the equipment. You then repay the amount over a period of time at a predetermined interest rate that largely depends on your credit score.  

Equipment financing usually requires a slightly lower credit score than a bank loan or line of credit, since the equipment itself serves as collateral on the loan. In contrast, equipment leasing involves paying a set amount at regular intervals for the use of an expensive piece of equipment. Unlike equipment financing, you don’t actually own the equipment; however, leasing offers the flexibility to upgrade to a newer piece of equipment at certain times.  

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• Purchase Order Financing: If your growing business lands its first large contract and you need to acquire a lot of inventory quickly but don’t have the cash to pay for it, purchase order financing could be an excellent option. With purchase order financing, a lender will pay your suppliers to complete an order, and the supplier, in turn, pays you for the transaction discount and other costs. In short, this type of financing can ensure that your customers get the merchandise they are purchasing and that you get the profits from that purchase. 

Scrutinize the Terms of Your Loan 

Each lender has slightly different requirements, terms and fees. If you’ve been approved for a loan or other type of financing product, it is crucial that you carefully review the terms before signing on the dotted line. This includes looking at the details of the interest or fee that you’ll be paying, processing fees and repayment terms. These details will help you determine whether you can afford the loan.