What Is an LLC Loan?
Limited liability company (LLC) loans are financial products that help businesses that are set up as LLCs get the funds they need to operate. These loans help LLCs access capital for various needs, such as growing their business, buying equipment, hiring employees, and paying bills. LLC loans offer the advantage of separating personal liability from business liability, protecting the personal assets of the company's owners. To secure an LLC loan, businesses must demonstrate a strong financial profile through detailed financial statements, business plans, and other relevant documentation. Interest rates and terms vary based on factors like the LLC's financial health, loan amount, and repayment period. Some lenders may require collateral. LLC loans serve as a valuable financing option for LLCs, enabling them to support growth, manage expenses, and pursue new opportunities. Thorough research and comparison of lenders and small business loan terms are crucial to finding the most suitable loan option for an LLC's specific needs and goals.
Types of LLC Loans
SBA Loans
SBA loans are government-backed loans that help small businesses, including LLCs. These loans offer favorable terms and lower interest rates. SBA loans are available in different categories, such as the 7(a) Loan Program, which provides general-purpose funding, and the CDC/504 Loan Program, which focuses on real estate and equipment financing.
Business Lines of Credit
A business line of credit is a revolving line of credit that allows LLCs to get money when they need it. It provides flexibility by allowing businesses to borrow and repay multiple times within a predetermined credit limit. Interest is typically charged only on the amount borrowed.
Term Loans
Term loans involve borrowing a lump sum of money for a specific period with fixed monthly repayments. These loans are ideal for LLCs that require a one-time infusion of capital for major investments, such as purchasing equipment or expanding facilities.
Invoice Factoring
LLCs that experience cash flow gaps due to delayed payments from customers can utilize invoice factoring. With this type of loan, a business can get a portion (usually between 80% and 90%) of the invoice value up front, and the rest will be paid when the customer pays the invoice.
Can You Get a Business Loan With an LLC?
The legal structure of a limited liability company usually doesn't affect its ability to get a business loan. As long as the LLC is formed before submitting the loan application and meets the lender's requirements, it can obtain a business loan. The specific qualifications may vary depending on the lender and the type of LLC loan being sought. Small business lenders consider several factors during the evaluation process:
Personal credit score: a minimum score of around 690 is usually required to qualify for business loans with competitive rates and terms. However, if personal credit is less than ideal but the business finances are strong, options for bad credit business loans may still be available.
Time in business: traditional banks and SBA lenders typically require a minimum of two years in business, whereas online lenders tend to offer more flexibility, with requirements ranging from one year in business for term loans to six months for business lines of credit.
Annual revenue: banks usually have higher minimums, while online lenders may be more flexible. For newly established LLCs without established finances, financing options tied to personal credit, such as personal loans for business or business credit cards, may be necessary.
It’s important to keep in mind that while an LLC is formed to limit personal liability, most business loans require a personal guarantee. This agreement holds the individual personally responsible for loan repayment if the business is unable to fulfill its obligations.
How to Get a Business Loan for an LLC in 5 Steps
Check your credit score: start by reviewing your personal and business credit scores. A strong credit profile improves your chances of securing a favorable loan. Address any issues and take steps to improve your creditworthiness if needed.
Choose the right type of LLC business loan: determine the specific financing needs of your LLC and select the appropriate loan type. Options may include lines of credit, term loans, SBA loans, or equipment financing. Align the loan type with your business goals and financial requirements.
Compare lenders: research and compare different lenders to find the ones that specialize in providing loans to LLCs. Consider factors such as interest rates, loan terms, repayment options, and customer reviews. Look for lenders with experience in supporting LLCs and a track record of reliable service.
Apply for your LLC loan: gather all the necessary documentation, including financial statements, tax returns, bank statements, and a well-prepared business plan. Complete the loan application accurately and provide comprehensive information about your LLC's financials, projected use of funds, and repayment ability.
Receive your funds: once your loan application is approved, review the loan terms, conditions, and repayment schedule. If everything meets your requirements, accept the loan offer and receive the funds in your LLC's business account. Make sure to use the funds responsibly and as planned to support your business objectives.
Pros and Cons of LLC Loans
Pros of LLC Loans
Limited personal liability: one of the primary benefits of obtaining a business loan through an LLC is that it limits the amount of personal liability. In the event of business failure or debt, the LLC's members are generally not personally responsible for repayment.
Flexible loan options: LLCs have access to a wide range of loan options tailored to their specific needs. Whether it's a traditional bank loan, an SBA loan, or online lending platforms, there are options to cater to different financial situations and preferences.
Separation of business and personal finances: by obtaining a loan in the name of the LLC, it helps keep business finances separate from personal finances. This separation simplifies accounting and financial management, making it easier to track and manage expenses.
Cons of LLC Loans
Personal guarantee requirements: despite the limited liability protection of an LLC, many lenders require a personal guarantee from LLC members when applying for a loan. This means that members may still be personally liable for loan repayment if the business is unable to fulfill its obligations.
Potential collateral requirements: depending on the type of loan and the lender, collateral may be required to secure the loan. This can be a burden for LLCs with limited valuable assets or those seeking unsecured loan options.
Difficulty qualifying for loans: LLCs with limited operating history or weaker financial profiles may face challenges in qualifying for loans. Lenders typically assess factors such as credit scores, time in business, and annual revenue, which can be disadvantageous for newer or struggling LLCs.