Can You Get Loans With an LLC?

Limited Liability Companies (LLCs) represent a popular business structure, offering owners liability protection while providing operational flexibility. Like other business entities, LLCs frequently require external financing to support operations, fund growth initiatives, or manage cash flow fluctuations. Securing a loan for an LLC is indeed possible, and it functions similarly to how other businesses obtain financing. Lenders evaluate an LLC’s financial health and its ability to repay debt, considering the entity a distinct legal and financial unit separate from its owners for most purposes.

Understanding Eligibility and Required Information

Lenders assess several key factors when an LLC applies for financing to determine its creditworthiness and repayment capacity. A business credit score is a primary consideration, reflecting the LLC’s financial reliability and payment history, typically ranging from 0 to 100 with higher scores indicating lower risk. Lenders also examine the personal credit scores of the principal owners, as many small business loans, especially for newer LLCs, require a personal guarantee. A personal FICO score of at least 600-690 is often preferred for more favorable loan terms.

Lenders also consider how long an LLC has been in business; many traditional lenders prefer at least two years, while some alternative lenders may consider six months. Annual revenue thresholds are common to demonstrate financial strength. A personal guarantee may be required, especially for newer LLCs or if the LLC’s assets don’t fully secure the loan, allowing lenders to pursue personal assets if the business defaults.

To support a loan application, an LLC must compile a comprehensive set of documents. A detailed business plan is necessary, outlining how the loan funds will be utilized, company objectives, and revenue generation strategy. Financial statements, including profit and loss statements, balance sheets, and cash flow statements, provide a snapshot of the LLC’s financial performance and health.

Lenders typically request business and personal tax returns for the past one to three years to verify reported income. Business bank statements, usually for the most recent three to twelve months, are vital for showing consistent cash flow. Legal documents, such as the LLC’s operating agreement, articles of organization, and any required business licenses, confirm the entity’s legal standing. If the loan is secured, detailed information about collateral, such as real estate, equipment, inventory, or accounts receivable, will be required.

Common Loan Types for LLCs

LLCs have access to various financing options, each designed to meet different business needs and financial situations. Term loans are a common choice, providing a lump sum of money that the LLC repays over a fixed period with regular installments and a set interest rate. These loans are suitable for significant, one-time investments like purchasing equipment or expanding operations.

Business lines of credit offer flexibility, functioning much like a credit card with a revolving limit an LLC can draw upon as needed. Interest is only charged on the amount drawn, making them ideal for managing short-term cash flow gaps, unexpected expenses, or seasonal inventory needs.

Loans backed by the U.S. Small Business Administration (SBA) are highly sought after due to their favorable terms, which include lower interest rates and longer repayment periods. While the SBA guarantees a portion of these loans, they are issued by private lenders such as banks and credit unions. Common SBA loan programs include the 7(a) loan, which is versatile for various business purposes up to $5 million, and the 504 loan, designed for purchasing or improving fixed assets like real estate or machinery. SBA microloans, capped at $50,000, cater to smaller businesses for working capital or equipment.

Equipment financing allows an LLC to acquire necessary machinery or vehicles, with the purchased asset often serving as collateral for the loan itself. This option can preserve cash flow and is structured with repayment terms that align with the equipment’s useful life. Invoice factoring, also known as accounts receivable financing, provides immediate cash by allowing an LLC to sell its unpaid invoices to a third party at a discount. This can be particularly useful for businesses with long payment cycles to improve liquidity.

Merchant cash advances offer quick access to funds based on an LLC’s future credit card sales. While providing rapid financing, these advances typically come with higher costs and shorter repayment periods compared to traditional loans. Commercial real estate loans are available for LLCs looking to purchase, construct, or refinance owner-occupied properties, providing long-term financing solutions for physical business locations.

Navigating the Application Process

Once an LLC has gathered all necessary documentation and identified suitable loan types, the next step involves navigating the application process. Identifying the right lender is important, as options range from traditional banks and credit unions to online lenders. Each lender type may offer different loan products, eligibility requirements, and application turnaround times.

Submitting the application typically involves completing the lender’s specific forms, either through an online portal or in person. During this phase, the prepared business plans, financial statements, tax returns, and legal documents are uploaded or presented to the lender. It is important to ensure all information is accurate and up-to-date to avoid delays or rejections in the process.

After submission, the application moves into the underwriting phase, where the lender assesses the LLC’s creditworthiness and risk profile. Underwriters meticulously review financial documents, conduct credit checks on both the business and its owners, and analyze cash flow to determine repayment ability. They may request additional information or clarification during this period to complete their assessment.

The lender communicates the decision to the LLC, which can be an approval, a denial, or an approval with modified terms. If approved, the loan closing process begins, involving the signing of formal loan agreements. These agreements detail the loan amount, interest rate, repayment schedule, and any associated fees. For secured loans, collateral perfection occurs, which legally establishes the lender’s claim on the pledged assets.

Loan covenants are often included in the agreement, which are conditions the borrower must adhere to throughout the loan term. These can be affirmative covenants, requiring specific actions like providing regular financial statements, or negative covenants, restricting actions such as taking on additional debt or selling certain assets without lender consent. A common financial covenant is maintaining a specific debt service coverage ratio, ensuring sufficient cash flow to cover debt obligations. The loan funds are disbursed after all terms are finalized. The LLC is then responsible for adhering to the repayment schedule and complying with all covenants for the loan’s duration.