Limited Liability Company (LLC) is a popular business structure chosen by millions of small business owners. It offers tax benefits and protection that limits the liability of LLC members. LLC is simple and affordable to register.
However, the formation of LLC is only the beginning. Many small business owners need an LLC business loan to manage their expenses and support their growth. These loans can be used through traditional banks, credit unions, and online lenders. However, you need to understand the various financing options available to get the best LLC loan for your business needs and improve your approval chances.
Here’s what you need to know about the steps you should take to get an LLC loan and one.
Can I get a business loan from an LLC?
Yes, you can get a business loan from an LLC. Business lenders offer loans to a variety of business types, including LLC, sole owners, and businesses. Most lenders offer business loans to LLCs, but they do not specifically state that the product is an LLC loan.
If you have an LLC, there should be no problem finding a business loan. You will need to qualify according to your business loan requirements, but lenders usually offer loans to multiple types of businesses. General requirements include providing excellent personal and business credit scores, qualified business income history, and providing loan collateral.
How to get a small business loan for an LLC
When you are looking for an LLC business loan, you must follow the steps provided by your lender. Each lender may have a slightly different process, but these are the general steps to apply for an LLC loan.
1. Check your credit score
Some lenders take into account business credit reports and scores when making lending decisions. Available from Dun & Bradstreet, Equifax and Experian. However, your personal credit history and credit score are usually evaluated by small business lenders to determine whether they are suitable for the business loan and the interest rates you receive.
Personal credit scores range from 300 to 850. In addition to credit reports, credit scores can provide insight into how you previously managed your debt obligations. Traditional lenders, such as banks and credit unions, generally prefer good or good credit borrowers with a score of 670 or higher, but they can find more generous lenders. For example, you might be able to get an SBA loan with a score of 640.
There are also alternative small business lenders, such as online and peer-to-peer lenders, who may use their credit scores in the 600 range. But expect sudden borrowing costs.
You can request a free copy of your personal credit report at AnnualCredItreport.com. There are also several ways to get your credit score free through credit card issuers and other lenders in the FICO Open Access Program.
2. Choose the right type of LLC loan
There are several types of LLC loans to choose from. Before applying, consider credit score guidelines and compare the advantages and disadvantages of each option to determine which one is best for your company.
| LLC Loan Type | Minimum credit score | advantage | Cons |
|---|---|---|---|
| Term Loan | 600 |
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| Credit business line | 600 |
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| SBA 7(a) Loan | 640 |
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| SBA Micro Loan | 500 |
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| Equipment Funding | 600 |
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| Invoice factoring | n/a |
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| Merchant Cash Advanced | n/a |
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3. Calculate the amount of debt you can afford
When applying for an LLC business loan, you must provide the lender with the amount you want to borrow and the reason for the funds you need. Use a business loan calculator to determine the amount of loans that will not cause cash flow issues to the company.
For example, if you take a 3-year, $10,000 small business loan with an 8% APR, you’ll pay $313.36 a month and $1,281.09 interest during the life of the loan.
Make sure to adjust the numbers until you find monthly payments that your business can manage. That way you will know what to expect when shopping for an LLC loan. You can also refer to this calculator when exploring lenders and funding opportunities.
You can also use the debt-to-debt service ratio to measure how much debt you can afford. Lenders use these ratios to assess business finance. The debt-to-income ratio (DTI) calculates the amount of debt as a percentage of income, with a DTI of 36% or less advantageous. The debt service coverage rate (DSCR) calculates the amount of operating profit required to cover total obligations. Lenders like to see a DSCR of at least 1.25.
4. Compare LLC lenders
Once you know if you can afford to borrow, the next step is to start researching your lender. Explore what banks, credit unions and online lenders have to offer. Keep in mind lending standards, business loan interest rates, fees and loan terms when comparing options. Features to consider when comparing lenders:
- Minimum requirements: Most lenders have a minimum requirement for borrowers. Lenders typically require a certain amount of time in the business, annual revenue and a minimum credit score. By applying to a lender who meets your requirements, you will increase your chances of approving a business loan.
- Repayment terms: You should also consider the terms of your repayment and choose the length of the loan that suits your budget. Typically, terms range from 5 to 25 years. Longer terms reduce monthly payments, but also means paying more interest over time. The shorter terms will help you pay off your loan faster, but you will get a higher monthly payment.
- Funding speed: If your loan needs to progress faster rather than slower, consider approval and financing schedules. Online lenders can often fund their loans within 48 hours, but traditional banks can take more than a week.
LLC Loan Fees
It is equally important to run numbers to find the best deal in your LLC funding. Lenders who offer the lowest interest rates will not necessarily be the cheapest option if they charge a sudden origination fee. And if you plan to pay off your loan early, the upfront penalty hidden in the fine print can cause your borrowing costs to rise. Here are some common small business loan fees to look for:
- Origination fee: Many lenders will charge between 1% and 5% of the loan amount when they open a loan to cover administrative costs.
- Delayed payment fee: If one of the payments is delayed, the lender often charges a sudden fee.
- Early repayment fee: Also known as a prepayment penalty, some lenders charge a fee if they pay off their loan early.
- Service charge: There may be ongoing fees to cover administrative costs.
- Credit check fee: Some lenders charge a credit report fee to obtain a copy of your credit report.
- Underwriting fee: The lender can charge the loan underwriter a fee to review the application and prepare the loan document.
5. Collect the required LLC loan documents
Now that you’re ready to apply, it’s best to collect the necessary LLC loan documents that your lender will want to see. Here is a general idea of what you need:
- personal information. Name, address, resume, income source, and contact information for both you and the company co-owner.
- Company information. Company name and address, tax ID or EIN number
- Company finances. Two-year balance sheet, income statement, cash flow forecast, income tax returns, business bank account statement
- Legal Documents. Incorporation, business license, business insurance proof (if applicable)
- Business Plan. A document detailing how you intend to use the funds and financial benefits you provide to your company
Some lenders may request additional documents. Additionally, if you are offering a secured loan, you will need to provide information about the collateral. Contact your lender to decide what you need in advance to avoid processing delays.
6. Apply for an LLC loan
Many lenders offer LLC loans. Online lenders allow you to complete the entire application process online and upload support documents to your online dashboard for reviews. You will likely receive your decision within a few minutes or by the next business day.
However, traditional bank lenders can take days to weeks to provide a decision, especially if they need to apply for a direct loan. Waiting periods are often longer with SBA loans. However, since banks often have the lowest interest rates, building relationships is more likely to secure future funding.
Once approved, the lender will prepare a document for you to review and sign. Once the loan document is processed, the funds will be paid to you. Funding timelines vary depending on the loan product you choose and lender.
What happens if my LLC loan is denied?
If the application is rejected, you may not be in perfect luck. Start by reaching out to lenders, learn why your application was rejected and gain insight into what you can do to improve your approval odds to move forward.
You may need to see different types of loans. You could be a strong candidate for a business loan for poor credit, but this probably has a higher interest rate. Also consider alternative lenders. Online and peer-to-peer lenders tend to have fewer strict eligibility guidelines. You can also try out crowdfunding platforms. This includes raising small amounts of capital through donations and investments to the company.
If everything else fails, and that’s one of the reasons you’ve been denied the funds, we recommend taking the time to improve your credit health.
LLC Loan Replacement
If you don’t think an LLC business loan is right for your business, consider the following LLC loan alternatives:
- Micromen. You can find microloans via alternative lending sources or SBAs. A microloan is a small amount of loan, such as $50,000.
- Business grants. Business grants are free sources of funding that you don’t have to pay back. Business grants can also be used by companies that fall into certain categories, such as minority shareholders and women-owned companies.
- Crowdfunding. Crowdfunding is a method of raising small contributions from many individuals to fund a particular project or business idea. These individual investors can earn rewards in exchange for donations, such as business equity.
- Business credit card. Business credit cards work like traditional credit cards, allowing you to reuse your funds up to credit limits when making payments. Some cards come with additional perks, such as a promotional interest-free period and a rewards program.
Conclusion
To get an LLC business loan, you need to follow a few steps to find the right loan and lender. There are several types of LLC loans, so we recommend that you research different types to determine which one is best for your business. Consider the required loan amount, interest rate, fees and repayment terms.
Next, compare several lenders before choosing one and make sure they meet all of their requirements. Once you are ready to apply, we will collect the necessary documents. You then apply either online or in person and wait to ask if it is approved.
If you find that an LLC loan is not suitable for your business, there are other options. Consider alternatives like business credit cards, business grants, crowdfunding, and more.
