If you operate a limited liability company (LLC) and are looking for financing options, an LLC loan may be a viable option. It is a kind of small business loan that allows you to cover your daily expenses. You can also use the money to improve cash flow, invest in opportunities, or hire staff. Here’s what you need to know about LLC loans to decide if they’re a good fit for your business.
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What is an LLC Loan?
An LLC loan provides funds for small businesses organized as limited liability companies. They are similar to business loans found with traditional banks, credit unions and online lenders. Some LLC loans are even backed by the US Small Business Administration (SBA).
How Does an LLC Loan Work?
The best LLC loans help you cover your most pressing business expenses. Depending on the type of LLC loan you select, the money will be paid out in a lump sum or through a line of credit.
Some types of LLC loans are guaranteed, meaning you must provide some type of asset that helps secure the loan. Collateral can make it easier to get a loan with more favorable terms, as the lender takes less risk in lending you money and can seize your assets or assets if you fail to repay the loan. No collateral is required for unsecured loans.
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Most business loans also require a personal guarantee. This usually voids the liability protection you normally get when setting up your business as an LLC. Once you sign a personal guarantee, you are personally liable for repaying the loan if your business goes bankrupt. If you default, the lender can get after your personal property and assets.
What are LLC loans used for?
LLC loans are often used to promote business startups, growth, expansion efforts, and even corporate debt consolidation. Most lenders require applicants to disclose how they plan to use the money. Here are some of the most common applications:
- Startup costs to finance a new venture
- Business acquisition costs
- Purchases of equipment and inventory
- Working capital for operating costs
- Franchise Fees and Costs
- Advertising and marketing
- Large one-time purchases
- Refinancing or consolidation of corporate debt
- Commercial real estate
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It is important to note that some lenders have restrictions on the use of loans and you may not use business loan proceeds for personal expenses.
Types of LLC Loans
The type of LLC loan best suited for your business depends on your business’s financial status, your credit rating, and how long you’ve been in business. Also consider the financing timeline for each loan if you need quick access to loan proceeds.
There are five common types of LLC loans to choose from:
- bank loans
- Term Loans
- Business lines of credit
- SBA Loans
- Invoice factoring
How to Qualify for an LLC Loan
Before applying for an LLC loan, follow these steps to increase your chances of being approved.
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Build business credit
Lenders may look at personal and business credit scores when you apply for financing. So it’s best to make sure they are solid to increase your chances of approval. If your credit is on the low side, it’s a good idea to take some time to build up your personal credit quickly if you’re able to do so. But if you need financing quickly, you can get a bad credit business loan, although it comes with high financing costs.
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You may also need to build business credit. Here’s how:
- Register your business with the state (if applicable).
- Apply for an Employer Identification Number (EIN) on the IRS website.
- Get a DUNS number from DUN & Bradstreet, a major business credit bureau, to begin establishing your business credit.
- Open a business checking and savings account to separate your personal and business finances.
- Buy a business credit card or line of credit and manage it responsibly.
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Understand business loan requirements
Eligibility guidelines vary by lender. Here’s what you generally need to qualify for a business loan:
Annual sales: Most lenders have a minimum annual sales requirement, usually somewhere between $36,000 and $250,000 or more, depending on the lender and loan type.
Time in business: You must also have a certain amount of time in business to qualify for funding. It is generally between six months and two years.
Creditworthiness: A good or excellent credit score (FICO score of 670 and above for personal credit) will increase your chances of qualifying for a loan with competitive terms.
Industry: The industry in which your company operates must be stable and offer growth potential. (Some lenders have a list of prohibited industries).
Documentation: Prepare to provide personal and financial documents when applying for a business loan.
Traditional banks and credit unions generally have stricter requirements and slower financing times than online lenders, but usually come with lower rates and higher loan amounts. The flexibility of online lenders can come at a cost in the form of higher interest rates and fees.
Develop a business plan
Lenders want reassurance that your business is likely to succeed. They also want clarity on how you generate revenue and how you plan to use the money to grow your business.
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A business plan delves into these matters and breaks down financial projections. It’s not required by all lenders, but you may need it if you sign up with a traditional bank or credit union.
Some LLC loans come with collateral requirements. If you have a low credit score, you may also need to put up collateral to get approval for financing.
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Common types of collateral include business equipment, real estate, investments, and cash.
It boils down
An LLC loan can be ideal for your business. Before you apply, compare the different types of LLC loans, weigh the pros and cons of each option, and run the numbers to calculate how much of a business loan you can afford.
Also, research different lenders and get loan quotes to find the best deal on financing. Above all, make sure you comply with the lender’s guidelines. Doing so will increase your chances of approval so you can secure the money you need.
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Frequently Asked Questions
Do banks give loans to an LLC?Caret DownJa, LLC loans are offered through traditional banks, credit unions and online lenders.
Do you need good credit for an LLC loan?Caret Down A good credit score is ideal for getting an LLC loan, but some lenders will approve you for a loan with less-than-perfect credit, even though you’ll face higher borrowing costs.
Who is Liable for an LLC Loan?Caret Down The company is liable for the debt unless you countersign the LLC loan or provide a personal guarantee. Doing either of these will make you personally liable if the company defaults on the loan.
Can an LLC get an SBA loan?Caret DownYes. LLCs are eligible to apply for SBA loans as long as they are eligible businesses. Businesses that are not eligible include nonprofits, life insurance companies, non-U.S. businesses, and consumer or marketing cooperatives.