Incorporating your business as an LLC is a good idea for a number of reasons, not just obtaining a loan. In addition to helping you qualify for a business loan, an LLC helps protect your personal liabilities, maximize your write-offs, and more.
Keep reading to find out what an LLC is, pros and cons of forming an LLC, what type of LLC small business loans are available, and how to improve your chances of getting approved.
Key Points
• LLCs protect owners’ personal assets from business debts and liabilities.
• An LLC loan is a small business loan that is given to a corporation as opposed to an individual.
• Types of business loans that LLCs can apply for include business term loans, SBA loans, business lines of credit, merchant cash advances, and more.
• Common loan requirements include financial statements, tax returns, and business plans.
• To qualify for an LLC loan, most lenders require a minimum business history, credit score, and annual revenue.
What Is a Limited Liability Company (LLC)?
A limited liability company (or LLC for short) is a popular option when choosing a business structure. Essentially, an LLC is a separate legal entity from you that’s created under state law. It has its own assets, liabilities, bank accounts, and credit profile separate from yours.
An LLC can have one or more owners, and each owner is called a “member.” Even if you’re just a one-person operation, however, you may still wish to opt for this business structure.
Unlike a sole proprietorship (which is owned by one person with no distinction between the business and the owner), the members of an LLC have liability protection from the debts and obligations of the business. That means a business creditor or someone who sues the business can’t come after the personal assets of the owners. Like a sole proprietorship, however, the owner of an LLC pays taxes as an individual (not as a corporation).
To form an LLC, you choose a name and file articles of organization with your state’s corporate filing office, often the Secretary of State. And, if an LLC has more than one member, it must obtain its own IRS Employer Identification Number (EIN).
Recommended: Sole Proprietorship vs LLC: How to Choose
Pros and Cons of Forming an LLC
Here are some of the pluses and minuses of forming an LLC.
| Pros of Forming an LLC | Cons of Forming an LLC |
|---|---|
| Limited liability protection for owners/members | Leadership roles are less clear than in a corporation |
| Simple and inexpensive formation process in most states | Must renew with state (and pay a fee) each year |
| Allows you to separate your personal and business finances | Harder to raise funds from investors |
| Avoids double taxation | Risk of dissolution if one of the partners leaves the company |
Forming an LLC provides many advantages to small business owners. One of the biggest is that it can reduce your personal liability to debts incurred by the LLC. This liability protection comes without the work and expense of forming a corporation.
There are also some tax advantages. An LLC has pass-through taxation, meaning it does not pay corporate taxes on profits. Business profits pass through to the members, who pay personal income taxes on salary and other distributions received from the LLC.
On the downside, LLCs do not issue stock, which can be a powerful tool when raising capital. And, LLCs typically face higher annual fees than corporations. Some states also require annual reports in order to keep an LLC in good standing.
Another potential negative is that if a member joins or leaves an existing LLC, that LLC may be obligated to dissolve and reform with new membership.
How the Small Business Loan Process Is Different for LLCs
LLCs follow the same loan application process as other types of businesses. The major difference is who holds liability for the loan funds in case the borrower defaults.
With an LLC, the company owners are not personally responsible for the loan funds unless they sign a personal guarantee . In order to avoid having to sign a personal guarantee, your company typically needs to have an established financial track record or have some type of business assets to use as collateral to secure the loan.
What Is an LLC Loan?
An LLC loan is no different than any other type of small business loan, except it is given to the LLC and not the individual. As stated above, the business owners themselves are not liable for the loan unless they sign a personal guarantee. Instead, it is the business itself that is liable.
How Do LLC Loans Work?
An LLC loan works just like any other small business loan, since essentially that is what it is. The type of loan you choose will determine how the loan works. A business line of credit, for example, works similarly to a credit card. You are given a maximum limit of funds to which you can draw on. You make payments and pay interest only on the amount you spend.
A business term loan, on the other hand, is a lump sum of money given to you. The interest rate is usually fixed, allowing your monthly payments to stay the same until the loan is paid back.
What Expenses Are LLC Loans Used For?
LLC loans can be used for any type of business expense, including paying for working capital, hiring new employees, purchasing inventory, expanding your business, paying marketing expenses, launching a new business, refinancing existing debt, and more. Small business loans are not allowed to be used for personal expenses.
Recommended: Consolidate Business Loans
Types of LLC Business Loans
When exploring business loans for your LLC, here are some lending options you may want to consider.
Bank Loans
Banks will offer some of the most ideal loan amounts, terms, and interest rates. However, getting a business loan for an LLC from a bank generally requires strong financials and a good credit score. You also typically need to submit a fair amount of documentation in order to complete your application. If you’re looking for fast financing, a bank loan may not be the way to go.
Unsecured Loans
If your LLC is short on valuable assets or you would prefer not to put assets down as security on loans, an unsecured business loan may be a good option since they don’t require any collateral to qualify. However, since the risk is higher on the lender’s part, interest rates for unsecured business loans are typically higher than secured loans.
Online Term Loans
Online term loans generally have more flexible requirements than bank loans — meaning new LLCs, and even those with bad credit — may be able to qualify. In addition, the application process is typically quick and funding time can be fast. However, the ease and flexibility come at a cost — online business term loans tend to have higher interest rates and fees than traditional bank loans.
SBA Loans
LLCs are eligible to apply for SBA loans, which are offered by private lenders but backed by the U.S. Small Business Administration. Because this backing reduces risk for the lender, SBA loans offer LLCs some of the best interest rates, loan amounts, and repayment terms out there. However, SBA loans also have tougher qualification criteria when compared with other types of LLC business loans. And, the application and approval process can take months to complete.
Invoice Factoring
If your LLC processes a large amount of client invoices, another option to consider is invoice factoring. With this type of financing, the factoring lender pays you a percentage of your outstanding invoices up front. Once an invoice is paid, you’re given the remaining balance after a fee is subtracted for the lender. This type of financing can offer quick cash. However, fees can be hefty and the factoring company may take over communication with your customers.
Line of Credit
A business line of credit works differently than a traditional term loan. Rather than receiving a lump sum of money, a business line of credit gives you access to a pool of funds that you can draw from when you need funding. You only pay interest on the funds you draw.
Once you’ve repaid what you’ve borrowed, your line of credit will typically reset to the original amount. This can be a good way to iron out seasonal cash flow issues and keep you prepared for unexpected expenses.
Merchant Cash Advance
If you need cash quickly and your LLC processes debit and credit card payments from customers, you might consider a merchant cash advance instead of a loan. With this option, you get a lump sum of money upfront from the lender. The lender then takes a percentage of your business’s future credit and debit card sales until the borrowed amount, plus a fee, is repaid. This type of LLC financing is typically more costly than other options.
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How to Qualify for an LLC Business Loan
Below are some tips for choosing the best loan while also expediting the application process as much as possible.
Determine What You Need
Before you start applying for an LLC business loan, you’ll want to think about what you will do with the loan and exactly how much you will need to accomplish your goal. You may also want to create a detailed plan for how your company will use the funds and what impact you expect the money to have on your business growth.
Recommended: How Much of a Business Loan Can You Get?
Review Loan Requirements
To review loan requirements for a small business loan, start by checking the lender’s criteria, including credit score, business history, and revenue thresholds. Assess the loan amount, interest rates, repayment terms, and required documentation. Ensure the terms align with your business needs and capacity.
Consider Your Qualifications
Key factors lenders look at to determine your eligibility for a loan include:
• Revenues: Lenders will want to know if your business has sufficient cash flow to repay the loan or financing.
• Credit: This shows lenders how your company has managed debt in the past. If your business doesn’t have much credit history, the lender will likely want to check your personal credit.
• Time in business: Many lenders have a minimum time in business requirement. Some require a minimum of two years in business, while others will provide financing to younger businesses and even startups.
• Collateral: This is a tangible asset pledged to secure the loan. Not all business loans require collateral.
Recommended: Long-Term Small Business Loans
Compare Lenders
There are a variety of business loans available, and it can be wise to compare multiple options to find one with rates and terms that work best for you.
In addition to looking at the interest rate, you may also want to keep an eye out for any other costs, like origination fees (this is a percentage of the loan funds a lender takes as payment for processing the loan) and prepayment fees (a fee charged for paying off the loan early), which also impact the cost of the loan.
Gather Documentation in Advance
It can take time to collect all of the legal and financial documents you need to apply for an LLC business loan. Since most lenders request most of the same information, you can start pulling those documents as you’re rate shopping.
Once you start to apply for a loan, make sure your business loan application includes everything the lender asked for and in the appropriate format. This can help reduce any unnecessary back and forth, allowing you to get a decision as quickly as possible.
Requirements do vary by lender, but we’ve listed some common ones below.
Financial Documentation
• Business credit report
• Income tax return
• Personal financial statements from all owners with at least 20% interest in the LLC
• Up to one year of business bank statements
• Projected cash flow, income statements, and balance sheets
• Collateral documents that outline the value of any assets you intend to secure the loan with
Online lenders may allow you to digitally connect your banking and accounting software to import some of this information directly.
Business Documents
As an LLC, you’ll need to submit your LLC’s Employer Identification Number (EIN) and possibly also your IRS Form SS-4 notice (this is the notice you receive after filing an SS-4 application for your EIN).
You may also need to submit your articles of organization, which designates your registered agent and management structure, as well as your operating agreement to confirm the ownership structure, revenue sharing percentages, and other details.
In addition, a lender might request a business plan to demonstrate the market, competitive landscape, and growth projections after using the loan funds.
Other Important Documents
A lender may also want to see any relevant legal documents that impact the LLC’s finances. This could include existing loan agreements, leases, and contracts with other businesses.
Offer Collateral
And finally, you may want to consider offering collateral to secure your loan. Examples of collateral include equipment, buildings, invoices, home equity, inventory, real estate, vehicles, and securities, such as corporate bonds or certificates of deposit.
Putting up collateral reduces the risk to the lender, allowing them to possibly offer you a lower interest rate or better terms. Keep in mind, though, that if you default on your loan, the lender is able to seize your collateral.
Recommended: Business Loans for Bad Credit
The Takeaway
Getting a business loan as an LLC can help you reach your financial goals with an extra infusion of working capital. The best loan choice will depend on your LLC’s needs, as well as factors like your credit score, if you have collateral, how long you’ve been in business, and your company’s annual revenue.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Can you get a business loan as an LLC?
Yes. Lenders will review your application just as they would any other type of corporate applicant. You may need to submit documentation like your articles of organization to show the ownership structure. Otherwise, the application process should be similar to any other company’s experience.
Is it hard to get business loans as an LLC?
Each lender has its own criteria for approving business loans, including those for an LLC. Requirements may include a minimum amount of years in business, credit score, and annual revenue.
Can LLCs borrow money from banks?
Banks that offer any type of business loan will allow LLCs to apply. Depending on the loan and your company’s financial history and credit profile, you may be required to provide a personal guarantee. If you do, this eliminates the limited liability protection that typically comes with owning an LLC.
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