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 repay ment 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.
If you operate as an LLC and need funding, you might come across the term “LLC loan.” This isn’t a special type of financing. Most business loans available to LLCs are the same as those offered to other business structures like sole proprietorships or corporations.
When forming an LLC, you shield your personal assets from liability for business debts and obligations. However, depending on the lender and loan type, you may still need to personally guarantee the loan, which can affect your liability protections.
It’s worth weighing the pros and cons of LLC loans to decide what’s right for your business before applying.
Pros
- Access to funds
- Flexible options
- May help build credit
Cons
- Personal liability
- Can be expensive
- Eligibility requirements
- Limited disclosure requirements
Pros of LLC loans
LLC businesses are a popular funding solution for small business owners — and for good reasons. These are some of the pros of LLC loans to keep in mind.
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
Data from the 2024 Small Business Survey shows that 75 percent of businesses faced challenges associated with the escalating expenses of goods, services and/or wages. Another 51 percent struggled to manage uneven cash flow, and 56 struggled with paying operational expenses.
Flexible options
LLC loans are available through traditional lenders, such as banks and, credit unions. Alternative lending options are available through online lending programs, finance companies and peer-to-peer platforms. Most lenders offer a variety of loan options, including SBA LLC loans, to meet various small business needs. There are several types of LLC loans to choose from for just about any type of LLC, including:
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Loan type: |
Best for: |
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Best for established companies |
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Best for making long-term investments |
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Best for covering short-term expenses |
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Best if you’re seeking an affordable loan and have exhausted other financing options |
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Best for equipment purchases |
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Best for business owners with bad credit |
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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.
Building business credit can lead to lower interest rates for future financing. You may also be able to borrow more money. However, 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.
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. These are some of the cons of LLC loans that you should keep in mind.
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.
Eligibility requirements
You’ll need to provide both personal and business documents to qualify for an LLC loan. Be prepared to provide your name, address, social security number and date of birth, along with personal and business bank statements and tax returns.
A lender may also require your personal and business credit score to assess your ability to repay the loan. If you don’t have a solid personal score of at least 670 and a business score of 50 or higher, you may not qualify for an LLC loan or get less favorable terms, like higher interest rates and less time to repay.
They can be expensive
The lowest interest rates, starting at 7.31 percent, 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.
Bad credit business loans — like merchant cash advances and invoice factoring and financing — often come with exceptionally high costs. Factor rates typically range from 1.03 to 1.52, which can translate to APRs of 20 percent to over 99 percent, depending on the terms and repayment schedule.
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, typically starting as low as 6.47 percent, 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.
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 you 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
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