Access to reliable funding is a critical factor in the growth and success of any Limited Liability Company (LLC), whether you’re launching a new venture or expanding an established business. From purchasing equipment and hiring staff to covering operational costs and seizing new opportunities, having sufficient capital can make all the difference.
However, securing a business loan as an LLC can be more complex than other business structures, with lenders often requiring additional documentation and stricter eligibility criteria. This article will outline the various financing options available to LLCs, explain what lenders are looking for, and offer practical tips to help you navigate the loan application process with confidence.
How an LLC Loan Works
Loans for an LLC are not that different from any other type of business financing. However, because of the LLC structure, there are some factors that come into play.
- Secured and Unsecured Loans: Some LLC loans will insist on collateral, meaning you will need to provide an asset to secure the loan. This could be in the form of equipment, property, or inventory. The lending of money on this basis makes it a secured loan. You may still be able to receive an unsecured LLC loan, but those tend to require high creditworthiness.
- Personal Guarantee: Some lenders will not lend you money without a personal guarantee. If you sign such a contract, you void the liability protections that come with being registered as an LLC.
- Business and Personal Collateral: Business collateral tends to give you better terms since it is tied to the business. However, if they are insufficient, you may also need to provide personal assets as collateral.
Business Loans for LLCs: Your Options
There are several loans you can apply for as an LLC. Some of them are given out by government agencies like the Small Business Administration (SBA), while others are from banks and alternative lenders. Here are a few options.
SBA Loans
SBA loans tend to be the most affordable option. Your interest rates tend to be lower, the repayment time is generous, and the borrowing limits are surprisingly high. Unfortunately, these factors also make it extremely competitive, and approval requires going through the intensive SBA paperwork experience.
This is because the SBA loan process involves several time-consuming factors such as:
- Pre-Qualification
- Application and Documentation
- Loan Underwriting (Review of past loans, business viability, etc.)
- Approval Process
- Personal Guarantee if the loan is provided by a government-backed lender
Term Loans
This type of loan can be availed either through banks or alternative lenders. It’s a simple, lump-sum loan with a fixed interest rate and repayment schedule. If you use a bank for this type of loan, you get better rates. However, alternative lenders tend to give you faster approval along with less demanding eligibility requirements.
Business Lines of Credit
This type of funding is not limited to LLCs. Almost every business makes use of a line of credit. The best way to understand it is via a credit card analogy. You aren’t given a lump sum amount. Instead, you borrow according to your needs, such as when you need to buy, repair, or upgrade business equipment.
When you borrow from a line of credit, you do so with interest and must repay the borrowed amount plus interest.
Alternative Financing
If you’re a new LLC and perhaps aren’t able to meet requirements for any of the above from a bank, don’t lose hope. Lenders like Fast Business Finance offer alternative funding options like Merchant Cash Advances.
Merchant Cash Advance (MCA): This funding type is very easy to get, but it can be expensive. An MCA lender gives you a sum of capital. Instead of repaying it back like a traditional loan with monthly payments, your payments are based on a percentage of your daily or weekly business sales.
Thus, MCAs are not really loans, but a purchase of your future sales revenue. Because of this factor, they don’t have to follow traditional interest rate regulations, and this means higher overall costs.
You can also look into options like Invoice factoring.
Invoice Factoring: This is commonly used by LLCs with slow-paying clients, where you end up with a lot of outstanding invoices. You sell these unpaid invoices to a factoring company, and they give you a percentage of those invoices. This might range from 70% to 90%. The factoring company collects the payments from your customers, and then you get the remaining amount minus an agreed-upon fee.
How to Qualify for a Business Loan for an LLC
As we alluded to earlier, getting a business loan for an LLC can be a little challenging. Many lenders don’t want to deal with the limited liability component and make eligibility extra hard. Here are some ways to ensure you have a good chance of getting approval for a loan for your LLC.
Build Business Credit
There are several ways to increase your business credit. Your first objective should be to legitimize your business structure. So, ensure you have an EIN (employer identification number), a business bank account, address, phone number, and domain name.
Create a D-U-N-S number (Data Universal Numbering System) with Dun & Bradstreet and then start establishing good tradelines. Pay off your credit card on time, but don’t overuse it.
Understand the LLC Loan Requirements
This is a critical step that you need to be familiar with before even applying to a lender. Each institution will have different requirements, but there’s always a decent overlap. You should keep the following items always prepared:
- Business bank statements
- Tax returns and receipts
- Cash flow documentation
- Business license and other permits
- Business debt information
SBA loans might require a good bit more, while alternative lenders might ask for less, so prepare accordingly.
Develop a Viable Business Plan
No lender, whether it be a bank, an alternative lender, or an investor, wants to invest in a company without vision. Thus, a big part of qualifying for a loan is showcasing a comprehensive plan for business success. Your business plan should include:
- An executive summary
- Clear company description
- The latest market research
- Your organization and management structure
- Your products and services
- Marketing and sales strategy
- Financial projections
If you are requesting funding, specific information regarding the amount, purpose, and preferred terms is important.
Find the Right Lender
Getting a business loan for your LLC shouldn’t just be focused on terms alone. It’s also a good idea to research lenders before you start what may be a long-term financial relationship.
Frequently Asked Questions
What do I need to qualify for an LLC business loan?
As we covered, it will depend a lot on your lender. Most of the time, you’ll require a business bank account, proof of revenue, sometimes a personal guarantee, good credit, and more.
Can a new LLC get a business loan?
Yes, but it might be a little challenging. You can always approach the SBA and seek out microloans from their approved intermediary lenders in a pinch. Likewise, if you don’t mind higher fees and interest rates, alternative lenders and Peer to Peer (P2P) investors might be of help.
Does an LLC need to provide a personal guarantee or collateral?
Yes. You will often be expected to provide a guarantee. This can be a little disappointing because it feels like it invalidates the whole point of registering as an LLC. That said, not all lenders insist on a guarantee.
How do I choose the best option for LLC funding?
As with any other business decision, make sure you have a clear picture of your requirements. Compare the terms of different lenders and the tradeoffs between them. Finally, investigate lenders to ensure you borrow from reputable institutions.
Do business loans help build business credit for my LLC?
Yes. As long as you are paying back your loan on time, it will help increase your business credit. If possible, try to ensure your repayments are being noted by a credit bureau.
Stop Letting Lack of Funding Hold You Back
The more you delay getting funding, the more you fall behind your competitors. If you can ensure you use your funding effectively, it makes a bigger difference than minor differences in borrowing terms. You started an LLC, now it’s time to secure funding and grow your company.
Ready to Grow? Explore Your Options Today
If you just started an LLC and need funding, Fast Business Financial can support you. We are an alternative lender that specializes in loans for small businesses. Let us help you secure quick funding to grow your LLC and reach new heights. Our simple application process makes financing easier than you imagine.