Can an LLC Get a HELOC for Business Financing?

A Home Equity Line of Credit (HELOC) and a Limited Liability Company (LLC) are distinct financial and legal instruments. A HELOC provides a revolving line of credit secured by a homeowner’s personal residence. An LLC is a business structure offering owners liability protection and a separate legal identity. This article clarifies whether an LLC can directly obtain a HELOC and explores alternative business financing.

Understanding HELOCs and LLCs

A Home Equity Line of Credit (HELOC) functions much like a credit card, providing a revolving line of credit secured by the equity built in a personal home. The borrower can draw funds, repay them, and draw again up to an approved limit over a specified draw period, often lasting around 10 years. Lenders assess an individual’s personal credit history, income, and the available equity in their primary residence. Typically, borrowers can access up to 80-85% of their home’s value, minus any outstanding mortgage balance. The home itself serves as collateral, meaning default on the HELOC could result in foreclosure.

A Limited Liability Company (LLC) is a business structure legally separate from its owners, known as members. This separation provides limited liability protection, shielding the owners’ personal assets from the company’s debts and liabilities. An LLC can enter into contracts, incur debt, and own assets in its own name.

An LLC cannot directly obtain a HELOC because a HELOC is inherently tied to personal property ownership and an individual’s personal creditworthiness. A personal residence, which serves as the collateral for a HELOC, is not an asset of the LLC. Lenders evaluate the personal finances of the homeowner for a HELOC, while an LLC, as a separate legal entity, does not possess a personal residence or personal credit history in the same manner as an individual. This distinction ensures that the liability protection offered by an LLC remains intact, as the business’s debts are separate from the owner’s personal financial obligations.

Owner-Provided Funding

While an LLC cannot directly obtain a HELOC, an owner can personally secure a HELOC and then provide those funds to their LLC. This method involves the individual owner borrowing against the equity in their personal home based on their own financial standing and credit history. The funds are then transferred from the owner’s personal accounts to the LLC’s business accounts. This approach requires careful financial management to maintain the legal separation between personal and business finances.

The funds can be channeled into the LLC in one of two primary ways: as a capital contribution or as a loan from the owner to the LLC. A capital contribution is an investment made by an LLC member into the company, increasing their ownership interest or capital account. These contributions can be cash, property, or even services. Documenting these contributions, often in the LLC’s operating agreement, is essential for tracking ownership and for tax reporting.

Alternatively, an owner can provide funds to the LLC as a formal loan. This means the LLC incurs a debt to its owner, similar to borrowing from a third-party lender. For this arrangement to be recognized as a legitimate loan by tax authorities, it must be formalized with a written loan agreement or promissory note. This agreement should clearly outline terms such as the interest rate, repayment schedule, and any collateral involved. Failure to formalize the loan with clear terms and appropriate documentation could lead to reclassification of funds, potentially impacting the LLC’s liability protection.

Maintaining strict financial separation is paramount when an owner uses personal funds for the LLC. This involves keeping separate bank accounts for personal and business transactions and meticulously documenting all financial interactions between the owner and the LLC. Proper documentation of capital contributions and owner loans helps preserve the LLC’s limited liability shield, ensuring that personal assets remain protected from business liabilities. This diligence also aids in accurate financial reporting and compliance with tax regulations.

Business Financing Options

Since a HELOC is not a direct financing option for an LLC, businesses often explore other avenues to secure capital. Common options include:

Traditional Business Loans: These are a common choice, typically offered by banks and credit unions. They can include term loans, which provide a lump sum of money repaid over a fixed period with interest, or secured loans that require collateral such as equipment or real estate. Qualification often depends on the LLC’s business credit history, revenue, and a solid business plan, with many lenders preferring businesses that have been operating for at least two years.
Business Lines of Credit: These offer a flexible, revolving credit facility, similar to a credit card, that LLCs can draw upon as needed for working capital or to cover short-term expenses. Interest is typically paid only on the amount drawn, and as funds are repaid, they become available again. Qualification often considers the LLC’s revenue, time in business, and the owner’s personal credit score, which generally needs to be above 625-680. While some business lines of credit are unsecured, others may require a blanket lien on business assets.
Commercial Mortgages: For LLCs looking to acquire or develop commercial real estate, these loans are specifically designed for business property. Commercial mortgages typically require a down payment, ranging from 10% to 30% of the property’s value, and are secured by the commercial property itself. Lenders evaluate the LLC’s financial health, the property’s income-generating potential, and the owner’s experience in real estate.
Small Business Administration (SBA) Loans: These are government-backed programs designed to support small businesses, including LLCs, by reducing risk for lenders. The SBA does not lend money directly but guarantees a portion of loans made by approved lenders. Common SBA loan programs, like the 7(a) loan, can be used for working capital, equipment purchases, or real estate, with loan amounts potentially reaching up to $5 million. SBA loans often feature lower interest rates and longer repayment terms compared to conventional loans, and may be more accessible for businesses with less-than-perfect credit.