Pros and cons of LLC loans

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Published on June 27, 2024 | 5 min read

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Key takeaways

An LLC loan can provide access to funds for small business owners, and there are several flexible options available
An LLC loan may require a personal guarantee, leaving the borrower's personal assets vulnerable to debt repayment if the business fails
Business loans may be more expensive for those with lower credit scores, and limited disclosure requirements make it harder to compare lenders

A limited liability company (LLC) is a business structure offering protections to small business owners. When forming an LLC, you shield your personal assets from liability for business debts and obligations.

An LLC loan could be a viable option if you operate as an LLC and need funds for your business. While there are plenty of advantages to securing a loan, in most cases, an LLC business loan may require you to give up your protections. Before you try to get an LLC loan, here’s a look at the pros and cons of LLC loans.

Compare pros and cons of LLC loans

Pros

Access to funds
Flexible options
May help build credit

Cons

Personal liability
Can be expensive
Limited disclosure requirements

Pros of LLC loans

LLC businesses are a popular funding solution for small business owners — and for good reasons.

Access to funds

One of the top reasons small businesses fail is that they don’t have enough revenue. But an LLC can help cover your working capital needs, from filling cash flow voids when expenses exceed profits to providing access to cash when you experience a downturn in your business. LLC loans are often used to:

Start or grow a business
Purchase real estate
Purchase inventory
Cover unexpected or regular expenses
Purchase equipment

Bankrate insight

Data from the 2023 Small Business Credit Survey shows that 77 percent of businesses faced challenges associated with the escalating expenses of goods, services and/or wages. Another 49 percent struggled to manage uneven cash flow, and 52 struggled with paying operational expenses.

Flexible options

LLC loans are available through traditional banks, credit unions and online. There are several types of LLC loans to choose from for just about any type of LLC, including:

Loan type:	Best for:
Bank loans	Best for established companies
Term loans	Best for making long-term investments
Business lines of credit	Best for covering short-term expenses
SBA loans	Best if you’re seeking an affordable loan and have exhausted other financing options
Equipment loans	Best for equipment purchases
Invoice factoring	Best for business owners with bad credit
Merchant cash advance	Best for cash shortfalls and emergencies

May help build credit

Some business loans can help build business credit if the lender reports account activity to the business credit bureaus and you manage the loan responsibly. It’s not uncommon for traditional banks and credit unions to report payment activity. Financial institutions may also report business loans to personal credit bureaus.

Keep in mind that some alternative lenders don’t report to the credit bureaus. This is often the case for merchant cash advances, invoice financing and invoice factoring. Make sure you check with a lender to see if they report to credit bureaus and ask which bureaus they report to.

Bankrate insight

A business credit card is often a better way to build business credit. Business term loans charge interest the moment you receive funds. Business lines of credit charge interest on the amount you use. But with a business credit card, you can avoid interest charges as long as you pay your balance in full each month.

Cons of LLC loans

Even the best LLC loans have some disadvantages to consider.

Personal liability

Although an LLC helps protect your personal assets from liability for business debts, lenders often circumvent this barrier by requiring a personal guarantee.

When you sign a personal guarantee, you agree to assume personal liability for repaying the loan if your company cannot make the payments. That means a lender can come after your personal assets if your business fails to repay the loan.

Can be expensive

The lowest interest rates on LLC loans are generally reserved for borrowers with good-to-excellent credit scores. A lower credit score generally means you’ll pay more to access funding. The interest or factor rates are exceptionally high for bad credit business loans, including merchant cash advances, invoice factoring and invoice financing.

If you get a business line of credit, you could still spend a fortune in interest, even if you have excellent credit. The interest rate may be variable, so even if it starts out low, it could increase significantly as market conditions change.

Limited disclosure requirements

Consumer lenders are required to disclose the annual percentage rate (APR) to borrowers on consumer loans per the Truth In Lending Act. This information must be provided when you apply for a loan or credit card product and helps you understand borrowing costs to expect.

But this rule does not extend to business loans. Lenders aren’t required to display their rates and fees on their websites. They also don’t have to provide APRs and can instead use simple interest or factor rates, which can make it harder for business owners to compare lenders.

Should I get an LLC loan?

When considering whether to get an LLC loan, consider your business’s needs and why you are seeking financing.

Reasons to consider an LLC loan including expanding a business, taking advantage of a time-sensitive opportunity or addressing cash flow challenges. It also has the potential to build business credit, which helps when pursuing future financing.

That said, it may not be ideal for businesses already struggling with debt. Since LLC loans can be expensive, taking on another loan could result in a cycle of debt that is difficult to get out of.

Bottom line

An LLC loan can help your business flourish if you’re turning a profit but need additional funding to take advantage of growth opportunities. Be sure to compare the different types of LLC loans to determine which could work for your company and evaluate the pros and cons of each. Also, consider exploring the many alternatives to LLC loans if the cons outweigh the pros for your business.

Frequently asked questions

An LLC loan is any type of business loan open to limited liability companies. They can be found at banks and credit unions as well as alternative lenders like online and direct lenders.
Most traditional banks and credit unions prefer established LLCs with at least two years in business and credit scores in the good-to-excellent range. But online lenders have more relaxed eligibility requirements and may offer LLC loans for startups and business owners with bad credit. The downside is that these loans usually come with higher interest rates.
Good credit helps you qualify for the best financing terms. Qualifying for an LLC loan with bad credit is still possible, but you’ll generally have small loan amounts and higher borrowing costs.