Launching, running, and sustaining any business requires a significant outlay of capital—and for many entrepreneurs, this in itself might be a challenge, if not a barrier to entry. Therefore, getting a business loan with LLC can be a strategic move to fuel your company’s growth.
Additionally, many would-be business owners decide to structure their companies as a Limited Liability Corporation (LLC) based on flexibility and liability protection. However, a pertinent question remains: can you obtain a business loan with an LLC?
In this blog, we will uncover the factors that could impact a company’s eligibility for a business loan, whether you run an LLC in Texas, California, or any other state.
How to get a business loan with an LLC? Before diving into the specifics of securing a business loan for your LLC, it’s essential to grasp the fundamental concept of an LLC itself.
What Is An LLC?
Before examining loan requirement factors, it is important to have a firm understanding of some LLC basics.
An LLC is a legal business structure that incorporates the benefits of both a corporation and a partnership.
With an LLC, a business owner:
- Remains a separate business entity, meaning business liabilities, bank accounts, assets, and the like remain separate from personal finances.
- Can reduce personal liability in relation to any incurred debts associated with the LLC.
- Keeps their credit history and score separate from the LLC’s credit history and score.
- May experience some tax advantages with the IRS.
Loan Eligibility Factors and LLCs
Prior to applying for a loan, it is pertinent that the business owner of an LLC uncovers answers to some key questions.
First, why does the LLC need money? And secondly, just how much money does the LLC require to meet its goals and objectives?
A lender will always want to understand what an LLC is using the money for and will likely require an explanation about your plans, be it for product development and business expansion, acquiring inventory, investing in employees, equipment, or other key assets, buying or leasing real estate, or simply ensuring there is working capital so opportunities can be maximized upon.
Establishing sound reasoning for the purpose of the loan and confirming you know exactly how much you need to borrow are one of the foundational steps in the loan process.
Additionally, a lender will also be influenced by other realities outside of justification for the loan alone, including:
(1) Business Plan: All LLCs seeking loans should ensure they have a well-developed business plan outlining in writing overarching goals, financial projections, industry and market analysis, product and service offerings, and other strategies.
Taking the time to ensure this document is comprehensive and thought out can strengthen the case for loan approval.
(2) Personal Credit Score: While an owner’s personal credit score and history remain separate from the LLC, a lender still may want to consider personal factors when gauging financial responsibility.
(3) Business Credit Score: A lender will evaluate the LLC’s credit history, financial statements, and revenue projections when assessing the business’s ability to repay the loan.
(4) Collateral: A loan provider may also require collateral in the form of business assets and/or personal assets belonging to the owner.
(5) Financial Statements: The lender may also want to see tax returns, the company’s balance sheet, a profit and loss report, cash flow statements, bank account statements, and other key information when making a decision.
Remember, banks, online lenders, and credit unions all take a risk when they lend money to a small business.
They want to ensure an LLC is a good risk and has the ability to repay a loan.
One of the primary reasons an LLC is turned down for a loan is because there is a lack of supporting documentation and evidence.
LLC Business Loans Are Common
This information is likely to be music to the ears of any LLC business owner.
Simply put, LLC business loans are relatively common, and securing a loan as an LLC is not overly taxing.
However, remain aware that lenders might have different requirements; therefore, it is imperative to “shop around” in order to know the best options for your unique needs and goals.
Some common types of business loans that an LLC can explore include the following:-
(1) Term Loans:
A popular option for LLCs, term loans can be administered by a bank, credit union, online lender, or other financier.
A term loan involves borrowing a sum of money that is repaid over a fixed term length and features regular payments, typically on a monthly basis.
(2) Small Business Administration (SBA) Loans:
The United States Small Business Administration offers varied loan programs that are designed to assist small business financing, including LLCs.
These loans are partially guaranteed by the government, which makes them more accessible to businesses that may not qualify for a traditional bank loan.
These loans also tend to have lower interest rates—but be advised that application requirements are pretty strict.
(3) Unsecured Loans:
Simply put, this is a business loan that requires no collateral, and a lender offers approval based on creditworthiness.
A common type of unsecured loan is a business credit card that features a revolving credit line. The downside to an unsecured loan is that interest rates tend to be higher.
(4) Equipment Financing Loans:
An equipment financing loan could be a solid option for LLCs that need to purchase or lease equipment or machinery that is key to their operations or manufacturing process.
Additionally, the equipment will often serve as the collateral for the loan.
(5) Commercial Real Estate Loans:
Finally, if an LLC plans to buy or develop commercial real estate, there are loans that align with that objective.
These loans are usually designed specifically with real estate transactions in mind, which can assist in funding acquisition, construction activities, or property renovations.
The property, though, must be associated with business operations.
Securing funding is essential for the success of any LLC, which is why understanding how to get a business loan with an LLC is crucial.
How LLC Loans Work?
Basically, an LLC loan is when a lender gives your business money, and you pay it back with interest. It’s like borrowing from a friend, but with paperwork. The money can be used for anything from hiring new staff to buying equipment.
Here’s a breakdown:-
- Lender: This is the financial institution (like a bank, credit union, or online lender) that provides the loan.
- Borrower: Your LLC is the borrower.
- Loan Amount: The specific sum of money provided by the lender.
- Interest Rate: The cost of borrowing the money, usually expressed as a percentage.
- Repayment Term: The timeframe within which you must repay the loan, including interest.
How To Apply For A Business Loan With An LLC?
If you find yourself ready to apply for a business loan with an LLC, take these next steps:-
(1) Prepare your LLC documentation
Gather essential documents, including your blogs of Incorporation, Operating Agreement, Employer Identification Number (EIN), and other relevant licenses and business permits.
(2) Ensure you have established a strong business credit profile
Analyze your business credit history for accuracy and confirm no potential red flags could prevent you from obtaining a business loan.
(3) Confirm that your business plan aligns with your loan needs
Ensure your vision is clearly communicated so a lender understands what you will use loan proceeds for.
(4) Research potential lenders
Explore various potential lender options available to help you getting a business loan with LLC.
For example, traditional banks, credit unions, alternative lenders, and SBA loans.
Compare interest rates, terms, and eligibility criteria to find lenders catering to your LLC’s needs.
(5) Gather all needed financial documentation
Ensure you have financial statements, balance sheets, income statements, cash flow statements, and any other required information at the ready.
Lenders typically require at least two years of information demonstrating your business’s financial health.
(6) Complete the loan application
Fill out the loan application form provided by the lender.
Be complete and detailed, and ensure you hand over all requested information.
(7) Wait for a decision and then review and negotiate loan terms
Carefully review any received offers and confirm you understand interest rates, repayment terms, collateral requirements, and any associated fees.
If necessary, negotiate to ensure the terms align with your LLC’s financial capabilities.
(8) Provide personal guarantees, if required
Consider offering collateral to improve your chances to get a business loan with LLC.
Before agreeing to this arrangement, evaluate the risks and what you could be held responsible for individually.
(9) Sign off on all needed agreements
If you find the terms agreeable, then it is time to sign off on the final documentation and wait for your loan to be funded.
Business Budgeting
If it can’t, how are you going to be able to pay back a loan of any kind? You have to show that your operating budget is workable and feasable, and show that your business will be able to pay back any kind of loan in a given period of time.
Pro Tip: Effective communication with lenders can significantly impact your ability to get a business loan with LLC.
Pros Of LLC Loans
- It helps to expand operations, hire staff, or invest in assets.
- Helps in Protecting personal finances from business liabilities.
- It can potentially reduce tax burden through strategic loan use.
Cons Of LLC Loans
- Regular loan payments can impact financial stability.
- Interest payments reduce profit margins.
- Lenders often require personal guarantees.
- Excessive debt can hinder long-term growth.
Alternatives To LLC Loans
If traditional loans aren’t the best fit for your LLC, consider these options:
1. Self-funding: Use personal savings or profits to finance your business.
2. Investor Partnerships: Bring in investors to provide capital in exchange for ownership.
3. Crowdfunding: Raise funds from a large group of people through online platforms.
4. Government Grants: Seek out grants offered by federal, state, or local governments.
5. Business Lines of Credit: Access funds as needed up to a pre-approved limit.
Let’s wrap up with some key takeaways on how to get a business loan with an LLC:-
(i) Understand Your LLC: Know its structure and financial health.
(ii) Create A Strong Business Plan: Outline goals, financials, and market analysis.
(iii) Build Good Credit: Both personal and business credit scores matter.
(iv) Determine Loan Purpose and Amount: Clearly define your needs.
(v) Gather Documentation: Prepare financial statements, tax returns, and business plan.
(vi) Compare Lenders: Shop around for the best rates and terms.
(vii) Be Persistent: The loan process can be time-consuming.
Conclusion
When considering any loan as an LLC, it is imperative that a business owner carefully evaluate the terms, interest rates, repayment schedules, and eligibility requirements prior to making a final decision.
It is always recommended that an LLC owner meet and consult with a trusted financial advisor who can provide sound guidance, evaluate pros and cons, and help select the most suitable loan product for an LLC’s unique needs, circumstances, and goals. Networking with other business owners can provide valuable insights into how to get a business loan with an LLC.
FAQs
Generally speaking, an LLC business loan does not directly affect personal credit as long as the loan is solely in the name of the LLC and not personally guaranteed by the owners. However, a lender may check personal and business credit during the application process, which may appear on your credit report.
No, a loan is a borrowed amount that needs to be repaid, typically with interest, over a specified period. It is not considered income because it creates a liability for the LLC on its balance sheet, not a generated revenue. The loan repayment, including interest, is recorded as an expense on the income statement. Finally, interest earned by the LLC on its excess cash reserves held in a bank account or investment may be treated as income and subject to taxation.
Yes, having an LLC can make it easier to obtain business credit, including credit cards, lines of credit, and term loans. However, it is important to note that building a strong credit profile still requires sound financial management and timely repayment of debts. Therefore, this might require some time, but consistent effort and responsible financial practices increase a business’s chances of accessing credit resources.
