An LLC loan is any type of small business loan issued to a business structured as a Limited Liability Corporation (LLC). An LLC is one of several legal tax structures a business can operate as, with examples of other options including sole proprietorships, partnerships, and S corporations.
LLC loans can be used for many different business purposes, and you can choose from multiple types of LLC loans to suit your needs, as each has varying terms, loan structures, and repayment options.
Getting an LLC loan is similar to many other types of small business loans. After you’ve decided what you’ll use the funds for, you’ll need to select the right kind of loan, check your affordability and eligibility for the loan, and then shop lenders.
How an LLC loan works
When you apply for an LLC loan, you’ll need to provide documentation showing that your business has the ability to repay the loan. This can include financial statements showing its revenue and expenses over the past several years. If approved, the type of loan you applied for will determine whether you will be issued a lump sum of funds or access to funding. You can then use the funds for the intended or allowed uses stipulated in the loan agreement.
Repayment of the loan varies by lender and loan type, but is generally made on either a monthly or weekly basis. Some loans may offer the flexibility of seasonal or deferred payments. The terms of your specific loan will also determine whether the interest rate and payments are to remain fixed for the life of the loan or if the rate is variable, with future payments potentially increasing or decreasing.
Although the primary responsibility for repaying the loan is placed on the LLC, many LLC loans require a personal guarantee. This personal guarantee means that you agree to personally repay the debt in the event your business is unable to do so. It could also mean that your personal assets could be seized in the event that you default on the loan. This is something you should take special note of because it can take precedence over the typical protections you’re afforded as an LLC when it comes to safeguarding personal assets from business debt.
Types of LLC loans
Choosing the right type of LLC loan is critical because it can determine whether or not you get approved, as well as the specific rates and terms you’ll get. Some loan types may also prohibit funds from being used for certain types of expenses. For these reasons, you’ll want to ensure you choose the LLC loan best suited for your needs.
Here are five common loan types you can get as an LLC:
- Working capital loan: Best for general business use
- Term loan: Best if you need one-time funding
- Small business line of credit: Best for flexible access to additional funds
- SBA loan: Best rates for businesses with good credit and finances
- Equipment loan: Best for acquiring business equipment
Working capital loan
This is typically a short-term loan designed to help with daily business expenses. Common examples include payroll, rent, and other operating costs. Working capital loans can come in the form of a term loan, where funds are issued in a single lump sum. They can also be issued as a business line of credit, which allows business owners to draw funds on an as-needed basis.
The best working capital loans typically offer competitive rates, a wide range of qualification requirements to cater to different businesses, and an easy application process.
Term loan
A term loan issues loan proceeds in a single lump sum. This can be a good option if you do not have recurring needs for funding and know exactly how much money you need. Term loans can be included under other loan programs. For example, an equipment loan can be structured as a term loan if you are issued a lump sum of money that you then use to purchase business-related equipment.
U.S. Bank is a provider I recommend if you’re considering a term loan because it offers competitive rates, as well as options for both secured and unsecured financing.
Small business line of credit
A small business credit line provides flexible, ongoing access to funds you can draw whenever you need. You’ll be allowed to draw funds up to the credit limit you’ve been issued and can draw additional funds as you pay down the balance. Most credit lines are designed for short-term uses, as even many of the best small business credit lines have repayment terms of 36 months or less. Having access to a small business credit line can be beneficial for covering unexpected expenses, or for covering cash flow issues during periods of low revenue.
SBA loan
The Small Business Administration (SBA) is a government agency that has loan programs designed to help business owners grow and expand their operations. Loans are generally issued through private lenders and insured by the SBA. Different types of SBA loans are available, each catering to various types of companies depending on how the funds are to be used.
While SBA loans can offer competitive rates, you should know that they tend to take a long time to fund, upwards of 90-plus days, and typically require a large amount of paperwork. Working with a top SBA lender, however, can improve your chances of getting funded more quickly.
Equipment loan
An equipment loan provides funding for any business-related equipment. This can include things like vehicles, machinery, furniture, and computers. Equipment loans are often secured by the equipment being financed, which means that defaulting on the loan gives the lender the right to take possession of it or subsequently sell it to reduce its financial losses. Because of this, equipment loans are typically a lower risk for lenders, and can therefore come with highly competitive rates compared to other general business loans. This is especially true of the best equipment financing companies, which also offer fast funding speeds and easy loan application processes.
Steps to get an LLC loan
Getting an LLC loan consists of many of the same steps involved with getting a small business loan. You can view our guide for more details, but I’ll also summarize the steps below, as well as highlight the nuances involved specifically with applying for a loan as an LLC.
Step 1: Determine how funds will be used
Since different types of loans can have prohibited uses, you’ll want to make sure you know exactly how you’ll use the funds. This is an important step because misusing the funds could result in the lender calling your loan due and payable immediately.
Step 2: Find the right type of loan
Once you’ve identified how you’ll use the money from the loan, you’ll need to match it up with the right LLC loan program. Something to make special note of here is that you may find multiple LLC loans that can suit your needs, but each has its own set of pros and cons. For example, a general business term loan could be used to purchase business equipment. However, getting a specialized equipment loan could allow you to get a better interest rate.
Step 3: Check to see what you can afford
It’s never a good idea to rely on a lender’s loan decision when it comes to figuring out if you can afford the loan payments or not. For example, a lender may not consider short-term debt in its evaluation of your ability to qualify for a loan. However, your short-term cash flow could be a critical factor based on your specific company’s circumstances and goals.
If you end up not being able to afford the LLC loan payments, your personal assets may not be covered under the protections you’d typically get under an LLC. This is because many LLC loans require a personal guarantee, which overrides these protections, allowing the lender to pursue your personal assets to repay the business debt.
Step 4: Check your loan eligibility
Lenders will typically evaluate various aspects of your LLC’s credit and finances. Common business loan requirements include the following:
- Credit score
- Time in business
- Annual revenue
- Debt service coverage ratio (DSCR)
- Debt-to-income ratio (DTI)
- Loan-to-value (LTV) ratio, as applicable
- Financial reserves or collateral
- Proof of insurance
Step 5: Shop lenders and submit loan applications
One of the final steps is to shop lenders and then submit a loan application. Shopping lenders helps ensure that you’ll find the best rates and terms currently available. Many of the best banks for business loans also have complementary products and services that can allow you to simplify your business finances.
When you apply as an LLC, be aware that it means you’ll have to provide proof of your company’s ability to repay the loan. This often includes providing various financial documents from the following list:
- Business tax returns
- LLC articles of incorporation
- Business bank statements
- Financial statements (such as balance sheets, cash flow statements, and profit & loss statements)
- LLC business plan
Alternatives to an LLC loan
An LLC loan won’t be right for everyone. If you’re not able to qualify or are unable to find a suitable loan or lender, the following are alternatives that can still provide you with access to the funding you need:
- Rollover for business startups (ROBS): A ROBS allows you to access your retirement accounts tax- and penalty-free. This is made possible by navigating multiple areas of tax rules and regulations. To get guidance through this process and avoid the possibility of fines or penalties, you can work with one of our recommended ROBS providers.
- Crowdfunding: Crowdfunding is a way to raise money from the public. Businesses that crowdfund often offer various types of incentives in exchange for funding, such as discounts on future products or equity ownership in the company. You can utilize the top crowdfunding platforms to market your company’s product or service.
- Funding from friends and family: Raising money from friends and family can offer flexibility in how you get and use the money. For instance, the money can be offered to your business as a gift or loan. You can also offer equity if you want to forgo making loan payments. There are some nuances involved with this alternative, however, which we detail in our guide on raising money from friends and family.
Frequently asked questions (FAQs)
This depends on the strength of your company’s credit and finances. In general, it can be easy to get an LLC loan if you have been in business for at least two years, have a credit score over 680, and can show profitability over the past two or more years.
This depends on the lender you choose, the loan program you apply for, and the strength of your company’s credit and finances. Some lenders and loan programs have minimums and maximums dictating how much of a loan can be issued. Your company’s credit and finances must also support its ability to repay the debt.
Yes. However, it can be more difficult to do so as you’ll need to find a lender willing to work with startups and newer companies. Also, be aware that you may not qualify for a lender’s best advertised rates, and the loan review process can take longer and require more paperwork than usual.
Bottom line
If your business is structured as an LLC, it can apply for a small business loan. Different types of LLC loans exist, and the best one will depend on what you intend on using the funds for, as well as your company’s qualifications. However, be aware that while an LLC typically protects personal assets from business debts, many LLC loans require a personal guarantee, which removes that protection.
