If you’re a small business owner who is considering whether to register as a limited liability company, you might wonder if doing so will have an impact on your ability to get a small business loan. Fortunately, you can get a business loan with an LLC. The legal status of your business will not be a factor for lenders.
Understanding LLCs (Limited Liability Companies)
A limited liability company, or LLC, is a legal status for a small business that relieves the business owner or business owners of personal responsibility for their company debts. In other words, if you establish your business as an LLC, it becomes separate from you, and it can own property and have its own bank accounts. Then, if financial problems occur within the business, creditors can only seek money or other assets owned by the LLC rather than from your personal accounts. Two common alternative business structures to an LLC are sole proprietorships and corporations. If you register as an LLC, no other business in your state can use your LLC name, which can help you protect the brand of your small business.
Getting a Business Loan With an LLC: Overview
When it comes to lending money to small businesses, banks, credit unions and online lenders care about getting repaid. As a result, they will be less concerned about the size of your business or how it’s registered than if you’re equipped to generate the revenue necessary to pay back what you owe.
What are LLC Loans?
As the name implies, LLC loans are a type of business loan tailored specifically for limited liability companies (LLCs). There are several types of LLC loans to choose from to meet the needs of your small business. More on these shortly.
Advantages of LLC Loans
LLC loans come with their fair share of advantages that make them worth considering.
Funding for Startups
Securing capital is critical when starting a new venture. LLC loans provide the foundational funding needed to move from planning to execution, even if your business is in its early stages.
Purchase of Essential Supplies and Equipment
Having the right supplies and modern equipment on hand is essential for your business. Getting a loan for your LLC can help you buy these items, helping you maintain or boost your work quality and speed without creating cash flow issues in your company.
Hiring and Training Employees
Investing in a strong team is a long-term commitment that can pay dividends over time. LLC loans allow you to hire and train employees, which in turn provides you with a skilled workforce that can propel your company forward.
Improving Cash Flow
Managing cash flow can be a challenge, especially during lean periods or slow seasons. An LLC loan can provide a financial buffer to smooth out cash flow and keep operations running smoothly.
Business Expansion and Diversification
Growth typically requires capital, whether expanding your product line or entering new markets. With LLC loans, you can capitalize on opportunities by financing these long-term growth ventures and diversifying your offerings while minimizing risk.
Real Estate Purchase and/or Lease
For many businesses, a physical location is key to success. An LLC loan can be used to purchase or lease real estate – preferably prime locations that might otherwise be out of reach.
Disadvantages of LLC Loans
As with any business lending product, there are also drawbacks of LLC loans to consider.
Interest and Fees
Smaller loan amounts might have relatively higher interest rates, giving you steeper borrowing costs. These include application fees, origination fees and prepayment penalties that could make an LLC loan more expensive than initially anticipated.
Impact on Credit Score
Taking out a loan as an LLC doesn’t always separate personal and business debts. If you’re required to personally guarantee the loan, any late payments or defaults may affect your personal credit score. Furthermore, if the LLC’s debt level becomes too high, it could reflect poorly on your company’s credit history.
The Threat of Business Assets Seizure
If your LLC is unable to meet debt obligations, lenders may have the right to seize business assets as collateral. This poses a significant risk, especially if you rely on those assets for everyday operations.
Common Requirements For Getting a Business Loan with an LLC
Business owners might ask if it’s harder to get a loan as an LLC, and the answer is no. The common requirements for getting a business loan with an LLC are similar to most types of business loans offered to larger companies. However, some lenders give more weight to some requirements than others, so consider that when you are searching for a bank, credit union or online lender. Review these requirements and see if your LLC can satisfy them for the lender you choose to work with.
Use of Funds
Before you borrow money for your LLC, be sure you understand how you will use the funds. This exercise will help ensure that you don’t borrow too much and will better prepare you for questions your lender will ask before approving your loan. Whether you need to explain how you intend to use the funds will depend on the type of loan you are applying for and the lender’s requirements. For example, if you need equipment financing, you will be asked for proof of purchase so the lender is sure you used the financing for the equipment you need for your LLC.
Personal and Business Credit Score
Your personal credit score is a gauge that lenders use to determine whether you are a good credit risk. Your business credit score may not be established enough for lenders to use when deciding to offer your LLC a business loan. Therefore, do what you can to boost your personal credit score so that you qualify for lower interest rates and better loan terms. For a business loan, you may be expected to have a credit score above 670 on a scale of 300 to 850, depending on the lender.
Business and Financial Documents
Your lender will require certain business and financial documents to be submitted when you apply for a business loan. Your personal and business tax returns will be expected. You may also need to include annual revenue statements or profit and loss statements. If your LLC is fairly new, revenue projections may be acceptable. Some banks will need to see your business plan, which includes a description of your business and marketing strategy. Depending on the type of loan, you may need to submit accounts receivable and accounts payable reports.
Collateral
Some business loans are only available if you can offer collateral in exchange for financial assistance. Collateral is assets you own that the lender can seize if you are unable to make payments on the loan. Some examples of collateral include cash, vehicles, property, equipment and intellectual property. Lenders generally prefer tangible assets they can resell if necessary.
Other Helpful Documentation
You can be prepared to supply lenders with other helpful documentation when you apply for a small business loan. These documents may include business licenses, operating permits for your LLC, the employer identification number (EIN) for your LLC, and any existing loan agreements, leases and contracts you may have with other businesses. The lender you are working with will have its requirements for documents during the application process.
What Type Of Business Loans Can You Get with an LLC?
There are many types of business loans you can get with an LLC. The key is to know how much money you need to borrow and apply for a business loan accordingly.
Bank Loan
Your LLC can get a bank loan to finance your business. Still, traditional banks and credit unions oftentimes have requirements for loans you may not qualify for, such as being an established business with a good credit score. If you qualify for a bank loan, interest rates and other loan terms may be better. The application process may be time-consuming, however.
SBA Loan
You can get an SBA loan as an LLC but be prepared for a complicated approval process and long delays in receiving the funding. SBA loans are offered by approved lenders, and a big percentage of the amount you borrow is guaranteed by the U.S. Small Business Administration. If you meet the strict requirements to apply for an SBA loan, such as a good credit score and strong revenue, you might consider an SBA 7(a) loan, which is the most common type of SBA loan. With an SBA startup loan, you can borrow up to $50,000.
Unsecured Loan
An unsecured loan is simply one that doesn’t require collateral. Rather than relying on your assets as a guarantee that you will repay the loan, lenders approve unsecured business loans based on your creditworthiness. It could be a business credit card with revolving credit you use and pay as needed. Expect to pay a high interest rate on any amount you borrow with an unsecured loan.
Invoice Factoring
Invoice factoring is not a loan, but it’s one way to get cash to cover urgent business expenses. With invoice factoring, you sell outstanding invoices to a factoring company in exchange for the money you need. Invoice factoring might work for you if your main customers are other businesses. It is easier to qualify for than some other types of small business loans, but expect to pay high fees.
Line of Credit
A business line of credit is similar to a credit card. Instead of borrowing a lump sum of money with a traditional business loan, you get a credit line that you can draw cash on as you need it. You only pay interest on the amount you borrow, and you may not be expected to offer collateral as a guarantee that you will repay the line of credit. You can usually get a line of credit in any amount between $1,000 and $250,000. It might be something to consider if you need money for your LLC but don’t have a good credit score.
Merchant Cash Advance
A merchant cash advance is an expensive alternative to more traditional business loans. In fact, a merchant cash advance, or MCA, is not a loan at all. Rather, an MCA provider buys your future credit card and debit card sales at a discount. You get cash upfront from a merchant cash advance company and repay it, plus a fee, using a percentage of your credit and debit card sales.
What to Consider Before Applying for an LLC Loan
Before formally applying for funding, consider these key considerations to ensure an informed decision.
Analyzing Your Businesses’ Financial Health
To assess your business’s financial health, begin by reviewing your credit history thoroughly, as it plays a pivotal role in loan approval. Lenders will scrutinize your business and personal credit, especially if your company is relatively new and does not have a substantial credit file of its own. It’s also important to examine your financial statements. Lenders will likely review your profit and loss statements, balance sheets and cash flow forecasts to get a clear picture of your company’s financial stability and performance.
Understanding the Loan Agreement
When presented with a loan agreement, scrutinize the terms and conditions. This includes interest rates, repayment schedules and any collateral requirements. Be sure to understand the implications of the agreement and the long-term financial commitment. Consult with a financial advisor or legal counsel before signing if any terms are unclear.
Determining the LLC’s Ability to Repay the Loan
Consider your LLC’s cash flow projections and how the loan repayments will fit into your budget, especially over the long term. Analyze the potential for revenue growth and any upcoming business opportunities that may impact your LLC’s ability to meet financial obligations. Remember, securing a loan is committing to a financial relationship that requires careful planning and confidence in your company’s ability to make timely loan payments.
How to Get a Business Loan for LLCs
When seeking financing for an LLC, however, there are some special considerations that must be taken into account. To get a business loan for LLCs, here’s what you need to know:
1. Research Your Options: Before you can begin the loan application process, it helps to have an idea of what type of loan you need and which lenders are best suited to provide it.
2. Find a Lending Platform: Before applying for a loan, it’s essential to find the right lending platform. Consider talking to a business lending platform that works with multiple lenders and can help you find the right loan for your LLC’s needs. They often offer a wide range of business loans, from small business loans to lines of credit, equipment financing, and SBA loans. They also provide flexibility in terms of funding requirements.
3. Prepare Your Documents: To apply for a business loan for LLCs, you will need to provide certain documents that demonstrate the financial health of the company. These may include bank statements, tax returns, financial projections, and more. Make sure all these documents are prepared in advance so you can submit them quickly when needed.
4. Apply for Your Loan: Once you’ve identified your lender, you can start applying for your loan.
5. Submit Your Application: Once you have all your documents prepared, you can submit your application to any other lender of your choice. They will review the information provided and get back to you with an answer in a few days.
Conclusion: Choosing the Right LLC Loan for Your Business
When selecting an LLC loan, make sure to assess your business’s specific needs and circumstances. Your loan amount should align with your business plan and cash flow projections.
Borrowing more than you can strain your company’s cash flow, but borrowing too little might not cover your needs. Be sure to run the numbers before applying and familiarize yourself with the lender’s eligibility requirements.
Also, carefully review the terms and conditions of the loan agreement to fully understand what you’re committing to avoid any surprises later on down the road.
