Can an LLC Borrow Money From a Bank?

Limited Liability Companies (LLCs) offer personal liability protection and often seek external financing for operations or growth. Banks are a significant source of capital, providing various business loan products. While LLCs can borrow from banks, the process involves specific considerations different from personal loans. Understanding requirements and preparing thoroughly can streamline the application, increasing funding likelihood.

Lender Considerations for LLC Loans

Banks assess an LLC’s loan eligibility and risk based on several factors. Primary among these is business creditworthiness, distinct from an owner’s personal credit. Business credit scores, from agencies like Dun & Bradstreet, Experian Business, and Equifax Business, reflect payment history, credit utilization, and financial responsibility. A strong score signals lower risk and more favorable loan terms.

Lenders also examine owners’ personal credit scores, especially for smaller or newer businesses, as their financial behavior influences early business stability. Many banks require a personal guarantee, meaning the owner commits to repaying the loan if the LLC defaults, overriding limited liability protection for that debt.

The LLC’s overall financial health is another important factor. Banks analyze consistent revenue, profitability, and cash flow to determine repayment capacity. They review financial statements like profit and loss statements, balance sheets, and cash flow statements, to understand performance and stability. The debt-to-income ratio is also reviewed to ensure the company can manage additional debt.

The LLC’s time in business and industry stability influence lending decisions. Established businesses with a proven track record are less risky than startups. Banks and Small Business Administration (SBA) lenders prefer businesses operating for at least two years, and may require collateral like equipment or real estate to secure the loan. A well-structured business plan outlining operations, market analysis, management team, and financial projections demonstrates viability and strategic direction.

Preparing Your LLC for a Loan

Before approaching a bank, an LLC should prepare all necessary information. Comprehensive financial documentation is important, including business bank statements, tax returns, profit and loss statements, balance sheets, and cash flow statements. These verify the LLC’s financial performance, income, and health. Owners should also provide personal tax returns and bank statements, especially when a personal guarantee is anticipated.

Legal and organizational documents are required to confirm the LLC’s legal standing and ownership. These include the Articles of Organization or Certificate of Formation, which establish the LLC with the state, and the Operating Agreement, outlining internal governance and member responsibilities. These documents assure lenders of the LLC’s legitimacy and the authority of applicants.

Developing a business plan is a key preparatory step. It should include an executive summary, company description, market analysis, management team profiles, and realistic financial projections. Projections should demonstrate the LLC’s ability to generate sufficient cash flow to repay the loan. This plan provides lenders with a clear vision of the business’s strategy and potential for success.

Understanding the implications of a personal guarantee is important. Banks often require owners to sign one for business loans, especially for small businesses or those lacking substantial business credit. This means the owner’s personal assets could be pursued if the LLC defaults. Maintaining clear separation between business and personal finances is vital for loan readiness, involving dedicated business bank accounts and diligent bookkeeping.

The LLC Loan Application Journey

Once prepared, an LLC engages with financial institutions to secure funding. Research and choose a suitable lender, such as traditional banks, credit unions, or online lenders, each with different requirements and loan products. Evaluate lenders based on loan terms, interest rates, and eligibility criteria to find the best fit.

After selecting a lender, the LLC submits its completed loan application package. Submission can occur online, in-person, or via mail. The package includes all prepared financial, legal, and operational documents.

After submission, the application enters the underwriting process. The bank reviews all provided information, verifying document accuracy and assessing the LLC’s creditworthiness and repayment capacity. The bank may also have follow-up questions or request additional documentation.

The underwriting process culminates in a loan decision: approval or denial. If approved, the lender presents the LLC with a loan agreement detailing the interest rate, repayment schedule, and any specific covenants. Understanding these terms, possibly with legal counsel, is important before signing. After signing, loan funds are disbursed, initiating repayment responsibilities.