What is an LLC loan and how does it work?

AsiaVision/Getty Images; Illustration by Issiah Davis/Bankrate

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.

What is an LLC loan?

An LLC loan is any business loan that provides funds for small businesses organized as limited liability companies. An LLC loan isn’t a specific type of loan that you’ll find offered through lenders. Instead, they are business loans found at traditional banks, credit unions and online lenders. The U.S. Small Business Administration (SBA) may also back some LLC business loans.

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 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.

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

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 DUN & Bradstreet, 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 LLC 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 $50,000 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 and that you can successfully manage LLC loan repayments. 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

A small business loan geared for LLCs 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

• Does an LLC affect your personal credit score?

  Yes, an LLC loan can affect your personal credit score, as lenders often check your personal credit during the application process. It may also affect your credit if you sign a personal guarantee for the loan. In this case, your personal credit will take a hit if you default on the loan.

• Do you need good credit for an LLC loan?

  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. For example, if you get a loan with a bank lender, you’ll likely need a personal credit score of 670 or above. Yet online lenders may accept FICO scores as low as 450, though the usual minimum credit score is around 600.

• Who is liable for an LLC loan?

  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.

• Can an LLC get an SBA 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.