What is an LLC Loan and How Does It Work? | Bankrate (2024)

If you operate a limited liability company (LLC) and are looking for funding opportunities, an LLC loan could be a viable option. It’s a type of small business loan that can help you cover day-to-day expenses. You can also use the funds to improve cash flow, invest in opportunities or hire staff. Here’s what to know about LLC loans to decide if they’re a good fit for your business.

Key takeaways

  • An LLC loan is no different than other types of business loans except they’re aimed at businesses organized as limited liability companies
  • LLC loans can be used for various short- and long-term costs, including funding startup costs, equipment and inventory purchases, working capital and business debt refinancing or consolidation
  • Common types of LLC loans to choose from include bank loans, term loans, business lines of credit, SBA loans and invoice factoring
  • Eligibility requirements for LLC loans vary depending on the lender and typically include a minimum annual revenue, time in business, credit score and industry.

What is an LLC loan?

An LLC loan provides funds for small businesses organized as limited liability companies. They’re similar to business loans found at traditional banks, credit unions and online lenders. Some LLC business loans are even backed by the U.S. Small Business Administration (SBA).

How much is an LLC?

LLC costs can vary. Each state charges a fee to file an LLC’s articles of organization. While most states keep filing fees between $50 and $200, an LLC filing fee is only $35 in Montana. But in Massachusetts, an LLC filing fee will cost $500. There may also be ongoing fees like annual renewal fees and annual report fees

How does an LLC loan work?

The best LLC loans help you cover your most-pressing business-related expenses. Depending on the type of LLC loan you select, the funds are disbursed in a lump sum or through a business line of credit.

Some types of LLC loans will be secured, which means you’ll have to provide some type of asset that will help secure the loan. Business collateral can make it easier to get a loan with more favorable terms since the lender is taking less of a risk to loan you money and can seize your asset or assets if you fail to pay back the loan. There’s no collateral requirement for unsecured loans.

One of the main disadvantages of an LLC loan is that many lenders will also require a personal guarantee. This will usually void the liability protections you normally get when establishing your business as an LLC. Once you sign a personal guarantee, you are personally liable for paying back the loan if your business fails. If you default, the lender can come after your personal property and assets.

Bankrate insight

A formal business structure can help make getting approved for a business loan easier than a sole proprietorship. But can registering a business as an LLC help reduce racial bias in small business lending? A recent study in the Journal of Marketing Research suggests minority business owners who choose a sophisticated business structure (LLC, S-corporation or C-corporation) may have an easier time qualifying for a business loan.

What are LLC loans used for?

LLC small business loans are often used to foster business startup, growth, expansion efforts and even business debt consolidation. Most lenders require applicants to disclose how they intend to use the funds. Here are some of the more common uses:

  • Startup costs to fund a new venture
  • Business acquisition costs
  • Equipment and inventory purchases
  • Working capital for operational expenses
  • Franchise fees and costs
  • Advertising and marketing
  • Major one-time purchases
  • Business debt refinancing or consolidation
  • Commercial real estate

It’s important to note some lenders impose restrictions regarding loan usage, and you aren’t allowed to use business loan proceeds toward personal expenses.

Types of LLC loans

The type of LLC loan most suitable for your company varies by your company’s financial status, your creditworthiness and how long you’ve been in business. Also, consider the funding timeline for each loan if you need to access the loan proceeds quickly.

There are seven common types of LLC loans to choose from:

  • Bank loans
  • Term loans
  • Business lines of credit
  • SBA loans
  • Equipment loans
  • Invoice factoring
  • Merchant cash advances

Bankrate insight

SBA loans have difficult application processes and can take up to 90 days to receive funds. But the capped interest rates may make them the most affordable business loan for many business owners. Some types of SBA loans have low interest rates that are even accessible to business owners with bad credit or who work in underserved communities and struggle to qualify for traditional financing. For more information on SBA loans for bad credit or underserved communities, check out:

  • SBA microloans
  • SBA Community Advantage loans

How to qualify for an LLC loan

Before applying for an LLC loan, follow these steps to help improve your chances of getting approved.

Build business credit

Lenders may look at personal and business credit scores when you apply for funding. So it’s best to ensure they’re solid to boost your approval odds. If your credit is on the lower end, it’s a good idea to take some time to build your personal credit quickly if you’re able. But if you need financing quickly, you can get a bad credit business loan, though it will come with steep borrowing costs.

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 D-U-N-S number from , a major business credit bureau, to start establishing your creditworthiness as a business.
  • Open a business checking and savings account to separate your personal and company finances.
  • Get a business credit card or line of credit and manage it responsibly.

Understand business loan requirements

The eligibility guidelines vary by lender. Here’s what you’ll generally need to qualify for a business loan:

  • Annual revenue: Most lenders have a minimum annual revenue requirement, typically anywhere from $36,000 to $250,000 or more, depending on the lender and loan type.
  • Time in business: You’ll also need to have a certain amount of time in business to qualify for funding. It’s generally between six months and two years.
  • Credit score: A good or excellent credit score (FICO score of 670 and above for personal credit) improves your chances of qualifying for a loan with competitive terms.
  • Industry: The industry your company operates in should be stable and offer growth potential. (Some lenders have a list of prohibited industries).
  • Documentation: Prepare to provide personal and financial documents when you apply for a business loan.

Traditional banks and credit unions generally have more stringent requirements and slower funding times than online lenders but tend to come with lower rates and higher loan amounts. The flexibility of online lenders may come at a cost in the form of higher interest rates and fees.

Develop a business plan

Lenders want reassurance your company is likely to succeed. They also want clarity on how you generate earnings and how you plan to use the funds to grow your operation.

A business plan dives into these matters and breaks down financial projections. It’s not required by all lenders, but you may need it if applying with a traditional bank or credit union.

Offer collateral

Some LLC loans come with collateral requirements. If you have a low credit score, you may also be required to put up collateral to get approved for funding.

Common types of business collateral include business equipment, real estate, investments and cash.

Bottom line

An LLC loan could be ideal for your business. Before applying, compare the different types of LLC loans, weigh each option’s benefits and drawbacks and run the numbers to calculate how much of a business loan you can afford.

Also, research several lenders and get loan quotes to find the best deal on financing. Most importantly, ensure you meet the lender’s guidelines. Doing so helps boost your approval odds so you can secure the funds you need.

Frequently asked questions

  • Yes, LLC loans are offered through traditional banks, credit unions and online lenders.

  • 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, though you will have to deal with higher borrowing costs.

  • The company is liable for the debt unless you cosign the LLC loan or provide a personal guarantee. If you do either, you become personally liable if the business defaults on the loan.

  • Yes. LLCs are eligible to apply for SBA loans as long as they are eligible businesses. Ineligible businesses include non-profits, life insurance companies, businesses located outside the U.S. and consumer or marketing cooperatives.

What is an LLC Loan and How Does It Work? | Bankrate (2024)

FAQs

What is an LLC Loan and How Does It Work? | Bankrate? ›

Here's an explanation for how we make money. Limited liability company (LLC) loans are small business loans used to cover just about any business need. This includes funding startup costs, expansion or major purchases for your LLC. Most small business loans are available to LLCs, so it can be hard to choose a lender.

Is it hard for an LLC to get a loan? ›

Generally, the longer you've been in business, the higher your revenues are and the better your credit score, the better your chances of securing an LLC loan.

What are the benefits of an LLC loan? ›

Reasons to consider an LLC loan including expanding a business, taking advantage of a time-sensitive opportunity or addressing cash flow challenges. It also has the potential to build business credit, which helps when pursuing future financing. That said, it may not be ideal for businesses already struggling with debt.

Does a loan for an LLC affect personal credit? ›

Yes, an LLC loan can affect your personal credit score, as lenders often check your personal credit during the application process.

Can an LLC borrow money from a bank? ›

You can find LLC loans from banks, credit unions, online lenders and US Small Business Administration (SBA) partners. Here's a closer look at these loans, including how they work and tips for finding the best option for your business.

Can my business give me a loan? ›

Yes, it's technically legal for a member to borrow money from their LLC. However, you must get approval from other members if you're not the sole business owner. In addition, you must follow specific rules to avoid penalties or risks. Here are crucial considerations about obtaining a loan through your LLC.

Can a new LLC get an SBA loan? ›

SBA Business Loan for New LLC: Your Options. Two primary SBA loan options are available for LLCs and other small businesses in need of financing: the SBA 7(a) loan and SBA 504 loan. Each has specific ways funds can be used, and they offer different loan terms and loan limits.

What happens if an LLC can pay back a loan? ›

Overview of Corporate Limited Liability

If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations.

Can I use LLC to pay off debt? ›

General Rule: LLC Isn't Liable for Members' Personal Debts

The general rule in all states, including California, is that creditors can't take the money or property of an LLC to pay off the personal debts or liabilities of the LLC's owners.

What is the biggest benefit of an LLC? ›

A limited liability company (LLC) is a popular choice among small business owners for the liability protection, management flexibility, and tax advantages this form of business entity can provide.

What credit does an LLC start with? ›

LLCs are started at the state level, and there is no credit check involved.

Do banks check your personal credit for business loans? ›

Are you applying for a business loan? Commercial lenders may look at both your business and personal credit scores before they approve your application. If you have poor personal credit and you're wondering if it will affect your approval or the terms of your commercial loan, the answer is yes, it can.

Can I use a business loan to pay personal debt? ›

Using a business loan to pay off personal debt is generally not advisable, as it can lead to mixing personal and business finances, potentially causing legal and financial complications. It's best to keep personal and business debts separate for clarity and proper financial management.

How does an LLC get approved for a loan? ›

You will need to qualify for the business loan requirements, but typically, lenders will give loans to multiple types of businesses. Common requirements include good personal and business credit scores, qualifying business income history and providing collateral for the loan.

Can you use a business loan to pay yourself? ›

You must pay yourself a reasonable rate for the services rendered. If so, you can use SBA working capital funds to pay yourself.

Can I take money out of my LLC bank account? ›

If you have a single-member LLC, or a multi-member LLC operating as a partnership, you can take draws regularly by either writing a check to yourself from the LLC or simply transferring funds between your business account and your personal account.

What happens if an LLC defaults on a loan? ›

If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations.

Can a loan out company be an LLC? ›

A loan-out company can take many forms, such as an S-Corporation, C-Corporation, or LLC. As you might expect, each classification carries distinctive advantages, disadvantages, and regulations.

How to figure out your business credit score? ›

You can check your business credit score at the websites for Dun & Bradstreet, Equifax, and Experian, although they may charge a fee to see your scores. There are websites that will gather the information and report it for you all in one place, including Nav.

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