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Guide to LLC Loans and How They Work

What LLC Business Loans Are & How They Work
Lauren Ward

Lauren Ward

Updated March 26, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you own a limited liability corporation (LLC), you may be interested in borrowing money at some point in order to increase working capital or expand your business. Like any other type of small business, your LLC has access to a variety of small business loan options, including bank loans, SBA loans, online loans, and business lines of credit.The best type of loan for your LLC will depend on how much money you’re looking for, how quickly you need it, your personal and LLC credit scores, if you have collateral, and how long your LLC has been in business. Read on to learn:
  • How LLC loans work
  • Pros and cons of LLC loans
  • Best loans for LLCs
  • How to qualify for an LLC loan

What Are LLC Loans?

When picking a business structure, many entrepreneurs choose to go with an LLC. A key reason is that an LLC provides legal separation between the business and the owner. This means it has its own assets, liabilities, bank accounts, credit history, and credit score. Many banks and online lenders provide loan products for LLCs. These products include:
  • Bank term loans
  • SBA loans
  • Business lines of credit
  • Invoice financing
  • Merchant cash advances
Due to the legal separation, when you take out a loan for your LLC, you won’t be personally liable if the business should default on that loan. However, if you need to provide a personal guarantee to the lender in order to qualify for the loan, it will remove this shield, and your personal assets would be at risk if your LLC was unable to repay the loan.Recommended: Sole Proprietorship vs. LLC: How to Choose 

How LLC Loans Work

LLC loans work the same way as any small business loan. In the case of a traditional term loan, your LLC would receive a lump sum of capital (called the principal) from the lender. You would then gradually repay the principal, plus interest and fees. This typically means making fixed, monthly payments for a set period of time, which can range from several months to 25 years, depending on the lender and type of loan.LLC loans often require that you put an asset up as collateral — these are called secured loans. Loans without collateral are called unsecured loans, and often come with higher interest rates. In some cases, you may also be required to sign a personal guarantee, which would take away one of the benefits of an LLC, which is to shield you from liability. Whatever type of business loan you apply for, you’ll need to meet certain requirements. A lender will typically look at your personal and LLC credit reports and scores, your LLC’s financials (such as profit-and-loss statements and balance sheet), time in business, and whether or not you have collateral.  

Documents Needed for LLC Loans

Lenders often ask businesses to submit extensive documentation to help them decide if they want to lend money to them. Below are some of the documents you may have to submit (and may want to start collecting if you’re thinking about applying for an LLC loan).

Financial Information

These are records that show how well your business is performing and what other debt obligations it currently has. 
  • LLC bank and credit card statements
  • Tax returns for you (showing your pass-through income) and your LLC
  • Profit-and-loss statement
  • Balance sheet showing what your LLC currently owns and owes
  • Cash flow statement
  • Accounts receivable and payable
  • Detailed projections of your future revenues, expenses, and profits
  • Paperwork for other debts and loans

Business Information

This includes basic information and business documents you have for LLC:
  • Employer identification number (EIN)
  • Business registration
  • Business license
  • Business permits
  • Contracts with vendors
  • Proof of collateral
  • Business plan

Pros and Cons of LLC Loans

Like any financial product, LLC loans have benefits and drawbacks. Here is a look at how the pros and cons of LLC loans stack up.

Pros

Taking out a small business loan allows you to jumpstart your LLC’s growth without having to wait until your business has generated enough profit to fund the expansion itself. It also allows you to avoid bringing on investors and diluting your equity in the company. Plus, the interest you pay on the loan can typically be deducted on your taxes. Another perk of an LLC business loan is that you can generally use the money any way you see fit. And, as long as you aren’t required to sign a personal guarantee, you will not be personally responsible for paying back the debt should your LLC default on the loan.

Cons

On the downside, applying for a small business loan can require an extensive application process. And, in the case of a bank or SBA loan, it could be months before you receive funding.  In addition, your LLC will need to show strong financials and credit scores to qualify for a loan with good terms and low rates. You may also need to put up collateral, which means you could lose a business asset should your LLC be unable to repay the loan. If you don’t have collateral, the lender will likely ask you to sign a personal guarantee, which means your personal assets could be at risk.

Types of LLC Loans

There are various business loans for LLCs, and each offers different amounts, rates, and repayment terms. Before choosing a loan, it can be a good idea to consider how you will use the funds, and exactly how much you will need. You’ll also want to look at your LLC’s financials, such as gross business revenue, monthly cash flow, and credit score. This will help you figure out what type of loan your LLC may qualify for, as well as how much of a monthly payment you can afford. Below are some small business options that might make sense for your LLC.

Bank Loans

Banks offer traditional term loans, in which you borrow a set amount of money and pay it back with interest on a predetermined schedule. Banks will typically offer the most ideal terms (up to 25 years) and the lowest interest rates. The downside of a bank loan is that it can be difficult to qualify for, and the application and approval process can take several months. If you need money fast, a bank loan may not be the best option for your LLC. However, if you have strong credit and can afford to wait for financing, a bank loan can be a great choice for an LLC loan.You can find term loans at major commercial banks. If your LLC already has a relationship with a bank, that can be a good place to start.Estimated APR: 3% to 7% Minimum credit score: 700

SBA Loans

Small Business Administration (SBA) loans are insured by the federal government, so if you stop making payments, the lender will receive a large portion of the loan back through the SBA. This means less risk for the lender, larger loan amounts (up to $5.5 million), lower interest rates, and better terms for borrowers. The SBA 7(a) loan is popular because it provides working capital and can also fund equipment purchases and expansion. An SBA 504 loan, on the other hand, is designed for businesses that need to buy long-term, fixed assets such as facilities or machinery. If you’re looking for an LLC startup loan, the SBA microloan program might be a good fit.As with bank loans, SBA lenders have pretty stringent criteria for borrowers to meet, and the actual disbursement process can take a few months. Estimated APR: 5% to 8% Minimum credit score: 620

Online Loans

Online term loans are famous for being easier to qualify for than bank and SBA loans, which means new LLCs and those with poor credit may be able to qualify. In addition, the application process is often easier, and the loan disbursement is usually faster. The downside of getting an online loan is that you will likely pay more in interest and have less time to repay the loan (repayment terms range between six months and five years).Estimated APR: 9% to 99%Minimum credit score: 500

Business Lines of Credit

A business line of credit works in a similar way to a credit card. Instead of a lump sum of money, LLC owners receive a credit line that they can draw on as needed. This typically ranges from $1,000 to $250,000. Business lines of credit can be a great option if your LLC needs working capital but doesn't have a set amount that it needs to borrow. With this option, you only pay interest on what you actually borrow. Smaller credit lines may not require collateral, and you may also be able to qualify with a lower credit score.However, borrowing amounts are lower, and interest rates can be higher than what you’d get with a bank or SBA term loan. And, there are typically penalties for late payments.Estimated APR: 10% to 99%Minimum credit score: 550

Invoice Financing

Invoice financing is a speedy loan option for an LLC that has a lot of unpaid invoices that are hampering cash flow. With this loan option, you sell your LLC’s outstanding invoices to a factoring company at a reduced price (often 80 percent of the invoice value), which gives you immediate access to the cash. Once the invoices are paid to the factoring company, the remaining amount is forwarded to you — minus fees.Because invoice financing is self-securing (the invoices themselves serve as collateral), this type of LLC business loan is often easier to qualify for compared to other forms of funding. Invoice financing also comes with simple applications and fast funding times. However, costs are typically higher than other forms of financing.Average APR: 10% to 79%Minimum credit score: 530

Merchant Cash Advance

A merchant cash advance (or MCA) isn’t technically a loan, but, rather, the sale of future revenue in return for cash today. With an MCA, you sell your future revenue at a discount to a merchant cash advance company. To collect their money, the advance provider will usually deduct a percentage of your daily credit and debit card sales. The benefit of this type of LLC financing is that when business is slow, you pay back less, and when business is booming, you pay back more. The downside, however, is that a merchant cash advance is one of the most expensive types of business financing on the market. Your LLC may pay back 20% to 40% (or more) of the amount borrowed. This percentage is frequently displayed as a factor rate, which would equivalently be 1.20 – 1.40.Factor Rates: 1.1 and 1.5 Minimum credit score: 500

What If You Are Having Trouble Securing an LLC Loan?

Getting a business loan can be difficult if your LLC isn’t yet well-established or has a low credit score. However, there are two ways you can reduce your risk in the eyes of the lender — put up collateral or sign a personal guarantee.

Collateral

Collateral is often used to secure business loans. If you put up collateral and your LLC struggles and becomes unable to make payments, the lender can seize that collateral and sell it to repay the loan. When you’re willing to collateralize assets, lenders feel more at ease lending to your LLC. Collateral can be any asset that has value and, ideally, can be easily converted into cash. So cash, of course, can be used as collateral. Tangible assets owned by the LLC can also be used as collateral, as can future earnings (such as invoices you've sent out). You may also be able to use personal property as collateral.The amount of collateral needed will vary based on several factors, including your credit rating, the lender, how much you are borrowing, and the nature of the collateral. Below are assets that can often be used to secure a loan:
  • Cash
  • Invoices
  • Real estate
  • Equipment
  • Inventory
  • Vehicles
  • Treasury bonds
  • Stocks
  • CDs
  • Corporate bonds

Personal Guarantees

Providing a personal guarantee means that if the LLC becomes unable to repay the debt, you will be personally responsible for the balance. Personal guarantees reduce risk to a lender and can help an LLC that is not yet well-established or has an inadequate credit history qualify for a loan. However, it means that you could lose personal capital or assets should the business default on the loan. If you are going to provide a personal guarantee, you will need to provide your own credit history and profile as part of the LLC’s loan application.

Comparing Business LLC Loans With Lantern

If you're looking for capital to start or expand an LLC, there are all kinds of small business financing options to consider, from SBA startup loans to long-term, high-capital bank loans. To make sure you get the best loan rate and terms for your LLC, it can be a good idea to shop around and compare small business loans. With Lantern by SoFi’s online lending tool, your LLC can receive offers from multiple small business lenders with just one application and without making any type of commitment.
Photo credit: iStock/ dusanpetkovicThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. SOLC0122018

Frequently Asked Questions

Can LLCs get business loans?
Can you borrow money from an LLC?
Do LLCs have business credit scores?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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