When you’re looking to fund your business, getting a business loan is often a primary consideration, and it’s natural to wonder whether forming an LLC (Limited Liability Company) is a must to secure a business loan. While an LLC has specific benefits for businesses, it is not always a strict requirement to obtain financing. This guide will walk you through everything you need to get a business loan and what lenders typically look for in this type of loan.
What Is an LLC?
Limited liability companies (LLCs) are a type of business structure that combines the flexibility of a partnership with the liability protection of a corporation. It shields your personal assets from business debts and obligations, making it an appealing option for entrepreneurs. While LLCs have advantages, especially for legal protection, they are not mandatory to access business loans.
Pros and Cons of Forming an LLC
Forming a Limited Liability Company (LLC) can be a strategic move for many entrepreneurs, but it’s essential to weigh the benefits and drawbacks before making a decision. Here are some of the main advantages and disadvantages of forming an LLC:
Related: Pros and Cons of LLC Loans – Cashably
Pros:
- Liability Protection: An LLC provides a level of protection for your personal assets, such as your home and savings, in case your business is sued or incurs debt.
- Tax Benefits: LLCs are pass-through entities, meaning that business income is only taxed at the individual level, rather than at the corporate level.
- Flexibility: LLCs can have any number of owners, and ownership can be structured in a variety of ways.
- Credibility: Forming an LLC can help establish your business as a legitimate entity, which can be beneficial when dealing with customers, vendors, and partners.
Cons:
- Complexity: Forming an LLC can be more complex and time-consuming than other business structures, such as sole proprietorships or partnerships.
- Cost: There are costs associated with forming and maintaining an LLC, including filing fees and annual reports.
- Formalities: LLCs are required to follow certain formalities, such as holding annual meetings and maintaining a record book.
- Limited Access to Capital: LLCs may have limited access to capital, as they are not able to issue stock like corporations.
- Fastest funding 1 business day
- Min. time in business 6 months
- Term lengths Up to 60 months
4.8
- Loan amount Up to $500,000
- Min. time in business 6 months
- Min. annual revenue $250,000
4.8
Best for large business loans
- 3 Months in Business
- $10,000 in Monthly Rev
- Minimum Credit Score 550
4.9
Best for large business loans
- up to $1.5 million
- APR range Not disclosed
- Minimum Credit Score 570
4.7
Best for Small business loans
- Apply in Minutes
- No Hidden fees
- Wide range of Options to choose from
- Get funded in as little as 24 hours*
4.8
Can You Get a Business Loan Without an LLC?
Yes, you can. Lenders generally assess the financial health and creditworthiness of your business, not solely its structure. For example:
Sole Proprietorships:
You can apply for loans under your name. However, you’ll be personally liable for repayment.
Partnerships:
Partners can co-sign a loan and share the responsibility for repayment.
Corporations:
These businesses may qualify for loans separately from their owners.
In a traditional bank loans in most cases, lenders focus on factors like annual revenue amount, credit scores, time in business, and loan purpose, regardless of your business structure. However, if you are an LLC, you might consider a small business loan, which has specific characteristics and application processes tailored to limited liability companies.
How Does Having an LLC Affect Loan Applications?
Having an LLC can improve your chances of securing financing for several reasons:
- Professionalism: Lenders often perceive LLCs as more stable and organized businesses.
- Separate Entity: With an LLC, your business is a separate legal entity, which may make the loan application process smoother.
- Personal Liability Protection: Although many loans require personal guarantees, the LLC structure helps segregate your personal and business finances.
That said, forming an LLC does not guarantee approval for a loan. Your creditworthiness, financials, and the lender’s criteria for loan funds are much more critical. Lenders typically require a personal credit score of at least 690 to qualify for favorable interest rates, and terms, reflecting how personal finances can influence business financing options.
Key Requirements for a Business Loan
To qualify for a business or personal loan either, here are the main criteria most lenders look for:
- Credit Score: A good personal and business credit score (typically above 650) increases your chances.
- Business Revenue: Lenders usually require proof of consistent income, often in the range of $50,000 to $250,000 annually.
- Time in Business: Many lenders prefer businesses that have been operational for at least one to two years.
- Loan Purpose: Clearly outline how you plan to use the funds, whether for equipment, inventory, expansion, or working capital.
- Collateral: Secured loans may require assets such as equipment or real estate to back the loan.
- Business Bank Statements: Providing both personal and business bank statements is crucial to demonstrate financial stability and support the legitimacy of your LLC.
Related: How do you get a business loan with an LLC? Complete Guide
Qualifying for an LLC Business Loan
Qualifying for an LLC business loan can be challenging, but there are several steps you can take to improve your chances of approval. Here are some of the key factors that lenders consider when evaluating LLC business loan applications:
Credit Score: A good credit score is essential for qualifying for an LLC business loan. Lenders typically require a minimum credit score of 600-650.
Business History: Lenders want to see an established business with a proven track record of success. A minimum of 2-3 years in business is typically required.
Revenue: Lenders want to see a stable and growing revenue stream. A minimum annual revenue of $100,000-$200,000 is typically required.
Collateral: Lenders may require collateral, such as business assets or personal property, to secure the loan.
Business Plan: A well-written business plan that outlines your business goals, strategies, and financial projections can help demonstrate your creditworthiness.
When Should You Consider Forming an LLC?
While an LLC isn’t mandatory for loans, forming one can provide tax advantages in certain situations:
Seeking Larger Loans:
Lenders may feel more comfortable extending significant amounts to LLCs. Additionally, securing an LLC loan can streamline the application process and improve your chances of approval.
Growth Stage:
If your business is scaling, an LLC adds credibility and structure.
Mitigating Risks:
LLCs shield your personal assets in case of default (though personal guarantees may override this in some loans).
Types of Business Loans Available to LLCs
Both LLCs and non-LLC entities can access a variety of loans. Here’s a quick comparison:
| Loan Type | LLC Required? | Best For |
|---|---|---|
| SBA Loans | No | Long-term financing for established businesses |
| Business Line of Credit | No | Managing cash flow or covering short-term expenses |
| Equipment Financing | No | Purchasing machinery or tools |
| Term Loans | No | Large purchases or business expansion |
| Invoice Financing | No | Covering unpaid customer invoices |
| Unsecured Business Loans | No | Businesses without collateral |
LLC Business Loan Fees and Expenses
LLC business loans can come with a variety of fees and expenses, including:
These fees are charged by the lender for processing the loan application and can range from 1-5% of the loan amount.
LLC business loans can have interest rates that range from 5-30% APR, depending on the lender and the borrower’s creditworthiness.
These fees are charged when the borrower fails to make a payment on time and can range from $25-$100.
These fees are charged when the borrower pays off the loan early and can range from 1-5% of the loan amount.
Some lenders may charge annual fees, such as maintenance fees or renewal fees, which can range from $50-$500.
- Fastest funding 1 business day
- Min. time in business 6 months
- Term lengths Up to 60 months
4.8
- Loan amount Up to $500,000
- Min. time in business 6 months
- Min. annual revenue $250,000
4.8
Best for large business loans
- 3 Months in Business
- $10,000 in Monthly Rev
- Minimum Credit Score 550
4.9
Best for large business loans
- up to $1.5 million
- APR range Not disclosed
- Minimum Credit Score 570
4.7
Best for Small business loans
- Apply in Minutes
- No Hidden fees
- Wide range of Options to choose from
- Get funded in as little as 24 hours*
4.8
LLC loan fees
In addition, it is essential that you do the numbers for the best finance deals. If you get a business loan and lender offers bad credit at a low-interest rate, it’s more prone to being expensive to borrow. If you plan on paying the debt off early, you might have soaring debt payments. List some common small business loans cost. Light bulb icons. Bankrate Analysis. How can I find business loans? We review many leading LLC lenders.
Choose the right type of LLC loan
LLC loan options are diverse. Before making a decision, take a closer look at the credit rating guidelines to determine the best possible alternative. Bank rate insight Limited liability businesses can offer the right to avoid liability for a business failure in their loan and repayment terms.
In the case of the mortgage lenders, it’s a matter where most investors have a guarantee. No matter how many LLCs you’ve created or the number of individuals you’ve registered, you will never be able to get a loan from someone that wants your money back.
Related: Do You Need an LLC to Get a Business Loan?
LLC Business Line of Credit
Business credit lines work similarly to business credit cards. Instead of an annual payment in cash you will receive an online business bank account with a balance of up to $250,00 that your business needs. Often times, you can get business loan funds and credit approvals within 24 hours and use them as quickly as possible. Its perfect if your LLC business provides seasonal services with monthly payments that cover payroll or pay for your responsibilities at a slower rate.
Check your credit score
A credit score or personal credit history score are considered by some lenders when considering a small business loan decision. The products are also available through Equifax and Experian.
Credit history is generally assessed by small businesses lenders to find out what kind of loan you can get and how much interest you’ll pay. Personal credit ratings are between 850 and 330 and the more you are, the better. In addition, your credit report can help to understand how your debt was handled in previous years.
Gather necessary LLC loan documents
Now that you have applied, you must collect all the necessary LLC documents that the lender would like to view. Some lenders may require more documentation. You must disclose any information about your collateral when applying for secured business term loans.
Get information from your lenders to ensure the process is smooth. Lightbulb Icons Bankrate Insights A secured Business Loan is a finance option where you have to invest in an asset as a safeguard to the bank loan. It may be seized from you by default if you don’t repay the loans.
Invoice Factoring
The invoice factoring option for LLCs can be used for invoice processing as it can be adapted for large volumes loan payments. For these types of financial services, a factoring lender provides a percentage upfront of the outstanding invoices.
Once the payment has been completed a balance of the bill is refunded after a refund fee is refunded. It offers a quick loan. However, charges can be very high and the factoring company might interfere with customer communications.
Is it hard to get business loans as an LLC?
All lenders have different requirements to approve business financing such business term loans working capital, such as LLC financing. Requirements may include minimum time to operate, credit rating, and revenue.
Steps to Apply for a Business Loan
- Evaluate Your Needs: Determine how much money you need and why.
- Check Your Credit Scores: Know both your personal and business credit ratings.
- Prepare Documentation: Gather tax returns, business financials, and legal documents.
- Choose a Lender: Compare banks, credit unions, online lenders, and consider SBA loans backed by the U.S. Small Business Administration for their lower interest rates and larger amounts, keeping in mind the stringent qualification criteria and lengthy approval processes.
- Apply: Complete the application and provide all necessary information.
Do Personal Guarantees Affect Liability Protections?
Many business loans, regardless of structure, require a personal guarantee. This means that even as an LLC owner, you may be held personally responsible for repayment if your business fails to do so. Lenders often use this to reduce their risk, especially for new businesses or those with low revenues.
A personal guarantee essentially acts as a safety net for lenders, ensuring that they have a means to recover their funds if the business itself is unable to meet its financial obligations.
This requirement for personal savings is particularly common among small business loans and those offered by online lenders, who may view new or small businesses as higher risk than traditional lenders.
For LLC and small business owners, this can be a double-edged sword. On one hand, it can facilitate access to necessary capital by reassuring lenders of repayment security. On the other hand, it can undermine the liability protections that an LLC typically provides, as personal assets such as your home, savings, or other personal property could be at risk if the business defaults on repayment terms of the loan.
It’s crucial for LLC and many small business owners, to carefully assess their business’s financial health and potential risks before a business loan requirements agreeing to a personal guarantee. Understanding the implications of such guarantees and considering alternative financing options that may not require personal guarantees can help safeguard personal assets while still achieving business funding goals.
Alternatives to Business Loans
If you’re having trouble qualifying for an LLC business loan, there are several alternatives for loan programs you get a business can consider, including:
- Business Credit Cards: These can provide quick access to capital, but often come with high interest rates and fees.
- Business Lines of Credit: These can provide a revolving line of credit that can be used to cover business expenses.
- Invoice Financing: This involves selling your outstanding invoices to a third-party lender, who then collects payment from your customers.
- Crowdfunding: This involves raising capital from a large number of people, typically through an online platform.
- Small Business Grants: These are government-funded programs that provide grants to small businesses that meet certain criteria.
By exploring these alternatives, you can find the right financing solution for your small business administration needs, even if traditional banks and business loans are not an option.
Tips for Improving Loan Approval Chances
- Separate Finances: Maintain a clear distinction between business and personal accounts.
- Build Credit: Focus on improving your credit score and maintaining good financial habits. Consider using a business credit card for everyday purchases to help build your business credit profile.
- Show Stability: Demonstrate consistent cash flow and operational stability.
- Offer Collateral: Providing collateral can make you a more attractive candidate for secured loans.
You do not need an LLC to get a business loan, but having one can streamline the process and offer additional protections from online lenders and business loans. The most important factors are your financial health, creditworthiness, and business performance. If you’re serious about scaling your business or protecting your assets, forming an LLC could be a worthwhile step.
By carefully preparing and understanding your financial statements and what lenders look for, you can secure the funding you need—whether or not your business operates as an LLC.
Frequently Asked Questions
Can I Get a Business Loan Without an LLC?
Yes, you can obtain a business loan without forming an LLC. Lenders primarily evaluate the financial health and creditworthiness of your business, not just its structure. Sole proprietorships, partnerships, and corporations can all qualify for business loans. However, these entities may expose personal assets to risk, unlike an LLC that offers liability protection for personal loan.
Is It Easier to Get a Loan as an LLC?
Forming an LLC can make the loan application process smoother due to the perceived professionalism and credibility of the business structure. Lenders often view LLCs as more stable and organized, which can enhance your small business owners license chances of loan approval. However, your credit score, financial history, and business performance remain the most critical factors.
How Big of a Loan Can a New LLC Get?
The size of the loan a new LLC can obtain depends on several factors, including the business’s revenue and cash flow, creditworthiness, and the lender’s criteria. Typically, new LLCs may qualify for smaller loan amounts initially, as lenders prefer businesses with a proven track record. Demonstrating strong financials and a solid business plan can help increase the loan amount.
Do I Need an LLC to Get Business Credit?
While having an LLC can help establish business credit, it is not mandatory. Sole proprietorships and partnerships can also build business credit. However, an LLC offers the advantage of separating personal and business finances, which can protect personal credit scores and assets. Establishing an LLC can enhance your own small business name’s credibility and improve access to credit options.
