How to Get a Business Loan for an LLC

Limited Liability Companies (LLCs) often seek business loans to grow or manage operations. Understanding the specific considerations for LLCs can streamline the loan application process and help secure needed capital. This guide outlines key aspects of obtaining an LLC business loan, from lender expectations to the application journey.

Understanding Lender Requirements for LLCs

Lenders evaluate an LLC’s creditworthiness through several criteria to assess repayment ability. A business credit score reflects how the company manages its financial obligations. While a business may aim for a score above 75 from agencies like Dun & Bradstreet or Experian, lenders often consider the owner’s personal credit score, especially for newer or smaller LLCs, to gauge financial responsibility. A personal FICO score of 670 or higher is generally considered good, though some lenders may accept scores as low as 500.

Most lenders prefer businesses operating for a certain period, as this indicates stability. Traditional banks and many Small Business Administration (SBA) lenders typically require at least two years in business, while some online lenders may consider businesses with as little as six months of operation. Annual revenue and consistent cash flow are important for demonstrating the capacity to repay a loan. Many lenders look for a minimum annual revenue of $100,000, though this can vary. Some larger banks may require annual revenues of $250,000 or more for certain loan products.

Collateral, assets pledged as security, reduces lender risk and can improve loan terms. Common types include real estate, business equipment, inventory, and accounts receivable. Lenders also examine the business’s debt-to-income ratio, often preferring a debt service coverage ratio (DSCR) higher than 1, typically a minimum of 1.25, to ensure sufficient operating income to cover debt payments. A well-structured business plan showcases the LLC’s viability, market position, and repayment strategy.

Common Financing Options for LLCs

LLCs have access to a variety of financing options, each suited for different business needs. Term loans provide a fixed amount of capital repaid over a set period, often with a fixed interest rate and regular payments. These are typically used for specific, one-time investments like purchasing equipment or expanding operations.

Business lines of credit offer flexible, revolving access to funds up to a predetermined limit, allowing an LLC to draw and repay funds as needed. This option is useful for managing short-term cash flow fluctuations or covering unexpected expenses. Funds can be accessed, repaid, and re-accessed, similar to a credit card.

SBA loans, partially guaranteed by the U.S. Small Business Administration, are attractive due to their often lower interest rates, longer repayment terms, and reduced down payment requirements. The SBA 7(a) loan program, the most common type, offers flexibility for various uses, including working capital, real estate purchases, equipment, and debt refinancing, with loan amounts up to $5 million. The SBA 504 loan program specifically targets the purchase or upgrade of major fixed assets like real estate or machinery, offering long-term, fixed-rate financing.

Equipment financing funds machinery or specialized tools, with the purchased equipment often serving as collateral. Commercial real estate loans fund the purchase, construction, or refinancing of business property, often requiring the property as security.

Merchant cash advances offer a lump sum in exchange for a percentage of future credit card sales. While providing quick access to funds, they typically come with higher costs and different repayment structures compared to traditional loans. Business credit cards can serve as a flexible, short-term funding source, offering convenience for day-to-day expenses and smaller purchases.

Gathering Documentation for an LLC Loan

Preparing a comprehensive set of documents is a necessary step for an LLC seeking a business loan. Lenders require specific financial and legal information to assess risk and determine loan eligibility.

Financial statements are foundational, including:

• Profit and loss (P&L) statement, showing revenue and expenses over a period.
• Balance sheet, providing a snapshot of assets, liabilities, and equity at a specific point.
• Cash flow statement, detailing cash inflows and outflows.

Lenders commonly request business tax returns for the past two to three years to verify income and financial history. Personal tax returns for the owners are typically required, particularly for smaller LLCs or when a personal guarantee is involved, as they offer insight into individual financial stability. Recent business bank statements, often for the last six to twelve months, are essential to demonstrate consistent cash flow and operational activity.

Legal documents confirm the LLC’s existence and structure, including:

• Articles of Organization or Certificate of Formation, which officially establish the LLC.
• Operating Agreement, outlining the ownership and management structure.

The Employer Identification Number (EIN) confirmation letter, obtained from the IRS, serves as the business’s tax ID. A well-developed business plan, outlining objectives, strategies, and financial projections, should also be ready for submission. If applicable, understanding the terms of a personal guarantee agreement, which makes the owner personally responsible for the loan if the business defaults, is important.

Navigating the LLC Loan Application Process

With documentation prepared, an LLC can begin the multi-stage loan application process. The initial step involves identifying potential lenders, from traditional banks and credit unions to online lenders. Each lender type may have different requirements, products, and application experiences.

Submitting the application involves completing a detailed form provided by the lender, either online, in person, or via mail. This submission includes compiled financial statements, tax returns, legal documents, and the business plan. Lenders then proceed with underwriting, thoroughly reviewing submitted information to assess creditworthiness, evaluate risk, and determine loan terms. This review period varies, often taking two to eight weeks for business loans, with SBA loans sometimes requiring four to eight weeks.

Following underwriting, successful applicants receive loan offers detailing proposed interest rates, fees, and repayment terms. Carefully review these terms, comparing offers to ensure the most favorable conditions. The final stage involves closing the loan, entailing signing formal loan agreements and associated legal documents. After closing, loan proceeds are disbursed to the LLC, typically within a few days to a week, allowing access to capital.