How to Get LLC Business Loans

Posted at 07:00h in Small Business Financing by Kelly Hillock

Establishing and running a Limited Liability Company (LLC) has many challenges, from managing startup costs to making sure there’s consistent cash flow for your day-to-day operations. Business loans can be specifically catered to LLCs and can be a great resource, helping you address immediate financial needs or support your long-term growth initiatives.

In this article, we will go through the many aspects of getting an LLC business loan, including understanding what an LLC loan is, exploring different loan programs available, looking at their pros and cons, and outlining the steps to qualify and apply for LLC loans.

What is an LLC loan?

An LLC loan is a type of business financing specifically designed for an LLC. They have many purposes, like covering startup costs, funding expansion projects, or managing the day-to-day operations. LLC loans can be acquired from traditional banks, credit unions, or online lenders. LLC loans, backed by the Small Business Administration (SBA), can offer more favorable terms and lower interest rates.

LLC business loans are different from personal loans used for business expenses in several ways. Unlike personal loans, LLC loans help protect the business owner’s personal assets by limiting liability to the company’s assets. This means that if the business fails, your personal finances will not be claimed as collateral.

Types of loan programs available for LLCs

Several loan programs are available for LLCs, each with specific features and eligibility criteria:

SBA 7(A) Loans: These loans are ideal for general business purposes, offering up to $5 million with favorable terms. Eligibility requires good credit, a strong business plan, and sufficient revenue.
SBA 504 Loans: These loans, which offer up to $5 million, are designed for purchasing fixed assets like real estate or equipment. They require substantial collateral and a solid credit history.
Equipment Loans: These loans are used specifically for purchasing business equipment. The equipment itself is used as collateral. Eligibility depends on the value of the equipment and the business’s financial health.
Term Business Loans: These provide a lump sum to be repaid over a fixed term with set interest rates. They are available from various lenders, including banks and online lenders, with criteria based on credit score, business revenue, and time in operation.

Pros and cons of LLC loans

LLC loans have various pros and cons that business owners should consider before applying.

Pros:

Low-Cost, Flexible Financing: LLC loans often come with competitive interest rates, especially those backed by the SBA, making them affordable for long-term growth.
Asset Protection: These loans help separate personal and business liabilities, protecting the owner’s personal assets.
Growth Opportunities: Access to substantial capital can facilitate expansion, equipment purchases, and other growth initiatives.

Cons:

Personal Guarantees: Some lenders require personal guarantees, which can put personal assets at risk if the business defaults.
Eligibility Requirements: The borrowing costs and eligibility depend heavily on the business’s length of operation and the owner’s personal creditworthiness.
Complex Application Process: Obtaining an LLC loan, especially through traditional banks or the SBA, can involve extensive documentation and a lengthy approval process.

How to qualify for an LLC loan

You might be wondering how to get an LLC business loan. Simply put, qualifying for an LLC loan involves meeting criteria set by lenders, designed to assess the stability and creditworthiness of your business. Here are a few of them:

Minimum Time in Business: Most lenders require that your LLC has been in operation for at least one to two years. This period demonstrates that your business is stable and has a track record of operations.

Revenue Requirements: Lenders typically look for a consistent revenue stream over the past year. This requirement varies, but showing steady income helps prove that your business can handle loan repayments.

Credit Score Requirements: Both personal and business credit scores are important. Most lenders prefer credit scores above 670. A higher score can improve your chances of securing a loan with favorable terms.

Documents:

Proof of LLC Registration: Documents such as your Articles of Organization or Certificate of Formation.
Tax Returns: Personal and business tax returns from the past two to three years.
Financial Statements: Recent profit and loss statements, balance sheets, and cash flow statements.
Business Plan: A detailed business plan that outlines your company’s goals, strategies, market analysis, and financial projections.
Bank Statements: Personal and business bank statements for the past six months.
Legal Documents: Any applicable licenses, permits, and agreements related to your business operations.

Make sure you meet these eligibility criteria and prepare the necessary documents to up your chances of qualifying for an LLC loan.

How To apply for an LLC business loan

Applying for an LLC business loan involves several steps. The process begins with evaluating your credit score and choosing the right loan option, followed by calculating your debt capacity, comparing lenders, and preparing a solid business plan. Here’s a detailed guide to each step.

1. Check your credit score

Checking your credit score ahead of time helps because it impacts your eligibility for a business loan. Lenders evaluate both personal and business credit scores, typically preferring scores above 670. You can obtain credit reports and scores from Dun & Bradstreet, Equifax, and Experian. For those with lower credit scores, alternative lenders are an option, though they may come with higher borrowing costs.

2. Determine the right LLC loan option

Choosing the appropriate LLC loan option depends on your specific needs. Evaluate the various loan types mentioned earlier, considering their advantages and disadvantages. Understand the credit score guidelines required for each loan type to ensure you meet the qualification criteria before applying.

3. Calculate how much debt you can afford

Use a business loan calculator to determine how much debt your LLC can afford. Enter the loan amount, repayment period, and annual percentage rate to find a feasible monthly payment and total interest. Consider your capital needs, expenses, and borrowing capacity. Opt for a lender offering flexible terms, transparent rates, and tailored solutions.

4. Compare LLC loan lenders

When comparing lenders, consider factors such as interest rates, repayment terms, funding speed, and loan amounts. These elements will help you find a lender that offers the best terms for your business’s financial situation.

5. Create a solid business plan

A solid business plan will help secure an LLC loan. Include an executive summary, company overview, products/services, market analysis, marketing/sales plan, organizational structure, day-to-day operations, and a funding request. This demonstrates your business’s viability and growth potential to lenders.

6. Apply for your LLC loan

Gather all required documentation, including proof of LLC registration, financial statements, and your business plan. Submit a complete loan application to your chosen lender. Ensure all information is accurate and thorough to avoid delays.

7. Review your LLC loan agreement and receive funds

Reviewing your LLC loan agreement thoroughly before signing is a big step in the loan process. Begin by carefully reading through all terms and conditions outlined in the agreement. Pay particular attention to the interest rate, repayment schedule & flexibility, any associated fees, and the total cost of the loan. Ensure that all details match the initial loan offer and your understanding of the agreement.

Next, check for any clauses related to prepayment penalties, late payment fees, and other potential charges that could impact your financial planning. Understanding these terms helps avoid surprises later. Also verify the loan amount, disbursement process, and use of funds restrictions, if any.

If any part of the agreement is unclear or if you have concerns, don’t hesitate to contact your lender for clarification. Ask specific questions to ensure you fully understand your obligations and the lender’s expectations. It’s better to address any issues upfront rather than face complications down the line.

Once you are confident that you understand and accept the terms, sign the loan agreement. After the agreement is finalized, the lender will disburse the funds, typically within a few business days. This timely access to capital will enable you to move forward with your business plans, whether for day-to-day operations, expansion projects, or other financial needs.