Can You Take Out a Business Loan With an LLC?

For limited liability companies (LLCs) seeking capital, obtaining a business loan is a common option. Lenders frequently provide financing to various business structures, including LLCs, recognizing their legal and operational frameworks. While specific requirements exist, LLCs are generally well-positioned to secure funding for operations, expansion, or other needs.

Lender Requirements and Required Documentation

Lenders assess an LLC’s creditworthiness by examining both its business credit score and the personal credit scores of its principal owners. A business credit score, such as Dun & Bradstreet’s PAYDEX, reflects payment history and reliability, while personal FICO scores indicate individual financial responsibility. Both scores are important because, especially for smaller or newer LLCs, the business and owners are closely intertwined financially.

Beyond credit scores, lenders evaluate financial metrics like the LLC’s time in business, annual revenue, and profitability. Businesses need to demonstrate a consistent operating history, at least six months, and sufficient revenue to cover loan payments. Strong financial health signals the LLC’s ability to repay.

To support the loan application, several financial documents are required. A comprehensive business plan outlines the company’s objectives, market analysis, financial projections, and management team, providing insight into strategic direction and repayment. Essential financial statements include Profit & Loss (Income) Statements, Balance Sheets, and Cash Flow Statements. These statements summarize revenues, expenses, assets, liabilities, and cash flow. Lenders use these documents to evaluate the LLC’s financial health, income generation, and cash flow management for loan repayment.

Business tax returns for the past three years are requested to verify reported income and expenses, ensuring consistency with financial statements. LLC formation documents, such as the Articles of Organization and the Operating Agreement, confirm legal establishment and ownership. For principal owners, personal financial statements and tax returns are often necessary to provide a complete picture of financial standing and any personal assets or liabilities affecting business stability.

Types of Business Loans for LLCs

Various business loan options cater to the needs of LLCs. Each type serves a distinct purpose and has specific repayment and use characteristics. Understanding these differences helps LLCs identify the best financing solution.

Term loans represent a common financing choice, providing a lump sum that an LLC repays over a fixed period with regular, monthly installments. These loans have a set interest rate and are often used for one-time investments like equipment purchases or expansion. For ongoing capital needs, a business line of credit offers a flexible solution, similar to a credit card. An LLC accesses a credit limit, drawing funds as needed and repaying only the amount borrowed plus interest, with credit becoming available again as repaid.

Small Business Administration (SBA) loans are government-backed programs designed to reduce lender risk, making it easier for small businesses, including LLCs, to obtain financing with favorable terms. The SBA 7(a) loan program is recognized, offering flexible funding for purposes like working capital, equipment purchases, real estate, and debt refinancing, with loan amounts up to $5 million and repayment terms up to 25 years. Another program, the SBA 504 loan, is tailored for financing major fixed assets like real estate or machinery, promoting business growth.

Equipment financing provides capital for purchasing machinery, vehicles, or tools. The equipment itself often serves as loan collateral, making it a secured option. Commercial real estate loans are designed for LLCs to acquire or refinance properties like office buildings, warehouses, or retail spaces. These loans involve larger sums and longer repayment periods, secured by the real estate being financed.

Invoice factoring or financing helps LLCs with outstanding invoices. Instead of waiting for payment, the LLC can sell accounts receivable to a third party at a discount for immediate cash, or borrow against invoice value. This helps improve cash flow by converting future revenue into working capital.

Applying for an LLC Business Loan

Once an LLC has prepared the documentation, the application process for a business loan involves several steps. Initial steps involve researching and identifying suitable lenders—traditional banks, credit unions, or online lenders—based on the LLC’s financing needs and eligibility. Different lenders specialize in various loan types and cater to different business sizes and stages.

After selecting potential lenders, the LLC must compile its application package, ensuring all documents are complete and accurate. This package includes detailed financial statements, tax returns, business formation documents, and a business plan. Submitting the application can occur through online portals, in-person at a branch, or via mail, depending on the lender’s method.

Following submission, the application enters underwriting and review. During this stage, lenders thoroughly assess the LLC’s creditworthiness and financial health, often requesting additional information or clarification. This due diligence allows the lender to evaluate loan risk and determine terms.

If acceptable, the lender extends a loan offer detailing terms, including loan amount, interest rate, repayment schedule, and fees. The LLC should review these terms and seek clarification before accepting the offer. Upon agreement, the loan moves to approval, where final checks are completed.

Concluding steps involve loan closing and funding. During closing, the LLC signs the official loan agreements, binding it to the terms. After paperwork is finalized and legal requirements met, funds are disbursed to the LLC, making capital available for its business purposes.

Understanding Personal Guarantees and Collateral

When an LLC seeks a business loan, lenders often introduce two concepts: personal guarantees and collateral. A personal guarantee is an agreement where an owner pledges personal responsibility for loan repayment if the LLC defaults. This means that despite the limited liability protection afforded by the LLC structure, the owner’s personal assets, like savings, real estate, or vehicles, could be at risk if the business fails to repay. Lenders frequently require personal guarantees, especially for smaller or newer LLCs, to mitigate risk, as they may lack long credit history or substantial business assets to secure the loan.

Collateral, conversely, refers to assets an LLC pledges as loan security. It acts as a safety net, providing a tangible asset lenders can seize and sell to recover losses if the borrower defaults. Common examples of assets used as collateral for LLC business loans include accounts receivable (unpaid customer invoices), inventory (like raw materials or finished goods), equipment (machinery or vehicles), and commercial real estate.

When collateral is offered, the lender places a lien on the asset, giving a legal claim. If the LLC defaults on the loan, the lender has the right to repossess and liquidate pledged assets to recoup debt. Pledging collateral can lead to more favorable loan terms, like lower interest rates or higher borrowing amounts, by reducing lender risk. Some loans are self-collateralizing, meaning the financed asset, like equipment or real estate, serves as collateral.