While LLC loans are available through a variety of traditional banks, credit unions and online lenders, you should understand the different funding options available to get the best LLC loan for your business.

Can you get a business loan with an LLC?

Many lenders offer business loans to LLCs, although they may not specifically state that their products are LLC loans. You will need to qualify for some common business loan requirements, and typically, these include good personal and business credit scores, qualifying business income history and providing collateral for the loan.

How to get a small business loan for an LLC

When looking for an LLC business loan, you’ll need to complete an application. Each lender may have a slightly different process, but these are common steps for applying for an LLC loan.

1. Check your credit score

Some lenders consider business credit reports and scores when making lending decisions. This information is available through Dun & Bradstreet, Equifax and Experian. Small business lenders also typically evaluate your personal credit history and score to determine whether you’re a good fit for a business loan and if so, what interest rate you may be eligible for. 

Traditional lenders like banks and credit unions generally prefer borrowers with good or excellent credit — typically a score of 670 or higher — but it’s possible to find lenders that are more lenient. For example, you may be able to get an SBA loan with a score as low as 640. There are also alternative small business lenders, like online or peer-to-peer lenders, that may work with credit scores in the 600 range, but expect steep borrowing costs.

2. Choose the right type of LLC loan

There are several types of LLC loans to choose from. Before applying, consider the credit score guidelines and weigh the benefits and drawbacks of each option to determine which is best for your company.

• Term loan

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  A business term loan provides a lump sum on approval that is then repaid in installments over a set period of time, typically five or more years.

  Pros

  • Lump sum up front
  • Repayable over a set period
  • Available at most financial institutions
  • Flexible use

  

  Cons

  • Borrowing costs are often higher for startups
  • Personal guarantee is typically required
  • Low credit score could lead to loan denial or higher interest rates

• Line of credit

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  A business line of credit functions similar to a business credit card. However, a line of credit typically offers a higher limit than a credit card. This type of borrowing offers a set draw period during which you can borrow money, followed by a repayment period.

  

  Pros

  • Revolving line of credit
  • Interest usually only charged on the money you spend
  • Reusable as you repay past loans

  

  Cons

  • Higher rates and fees compared to other types of business loans
  • Withdrawals may be limited to the draw period

• SBA 7(a) loan

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  Backed by the U.S. Small Business Administration, the SBA 7(a) loan functions like a traditional loan, with the principal and interest being repaid via installments over a set period of time. There are both secured and unsecured 7(a) loans available. There is also a fee that must be paid with 7(a) loans over $1 million known as a guarantee fee.

  

  Pros

  • Backed by the SBA, increasing chances of approval
  • Low interest rates
  • Longer repayment periods

  

  Cons

  • Not generally available to business owners with poor credit
  • Complex application process
  • Lengthy loan approval and funding timelines

• SBA microloan

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  The SBA microloan program, which was developed to assist traditionally underserved communities, offers up to $50,000 in financing. As secured loans, they require pledging collateral. In addition, lenders often require a personal guarantee. There may also be a packaging fee of 2% to 3% charged by the lender.

  

  Pros

  • Open to bad credit
  • Low interest rates
  • Longer repayment periods

  

  Cons

  • Complex application process
  • Lengthy loan approval and funding timelines
  • Limited lenders that offer this loan

• Equipment financing

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  Designed specifically for buying equipment, equipment financing is secured by the equipment being purchased. When taking out an equipment loan, a lump sum of money is provided. The funds are paid back in fixed installments with interest over a set period of time.

  

  Pros

  • Equipment acts as collateral
  • Open to startups and fair to bad credit

  

  Cons

  • May require large down payments
  • Loan could outlast life of equipment

• Invoice factoring

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  Invoice factoring involves converting unpaid invoices into immediate cash. A factoring company pays from 70 percent to 90 percent of each invoice’s value in cash upfront and then takes on the responsibility of collecting payment for the invoice from the client. After clients pay the invoice, the factoring company deducts its fees and provides the business any remaining funds owed.

  

  Pros

  • Lets you get an advance on outstanding invoices
  • Customer’s credit considered over business credit
  • Fast funding times

  

  Cons

  • Steep fees
  • Advances generally limited to 85% to 90% of the invoice amount

• Merchant cash advance

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  A merchant cash advance is a lump sum of cash that can be taken out against future sales. This type of lending comes with an aggressive repayment schedule and borrowing fees may be as high as 50 to 100 percent or more.

  

  Pros

  • Accessible to bad credit and startups
  • Fast funding for emergencies

  

  Cons

  • High interest rates
  • Short repayment periods

3. Calculate how much debt you can afford

When you apply for an LLC business loan, you’ll need to provide the lender with the amount you wish to borrow and the reason you need the funds. Use a business loan calculator to determine a loan amount that doesn’t create cash flow issues in your company.

For example, if you take out a three-year, $10,000 small business loan with an APR of 8%, you’ll pay $313.36 per month and $1,281.09 in interest over the life of the loan.

Be sure to tweak the numbers until you find a monthly payment that your business can manage. That way, you’ll know what to expect when shopping for LLC loans. You can also refer to this calculator as you explore lenders and funding opportunities.

You may also gauge how much debt you can afford using your debt-to-income ratio and debt service coverage ratio. Lenders will use these ratios to assess your business finances. The debt-to-income ratio (DTI) calculates how much debt you have as a percentage of your income, and a DTI of 36 percent or less is favorable. The debt service coverage ratio (DSCR) calculates how much operating income you have to cover your total debts. Lenders like to see a DSCR of at least 1.25.

4. Compare lenders that work with LLCs

Once you know how much you can afford to borrow, the next step is to start researching lenders. Explore what banks, credit unions and online lenders have to offer. Keep lending criteria, business loan interest rates and loan terms in mind when comparing your options.

• Minimum requirements. Lenders usually require a certain amount of time in business, annual revenue and minimum credit score. You will improve your odds of getting your business loan approved by applying to lenders whose requirements you meet.
• Repayment terms. Terms typically range from five to 25 years. While longer terms result in lower monthly payments, they also mean paying more interest over time. Shorter terms help you pay off the loan faster, but come with higher monthly payments.
• Funding speed. Consider approval and funding timelines if you need the loan proceeds sooner rather than later. Online lenders often can fund your loan within 48 hours, while traditional banks may take a week or longer.

5. Gather necessary LLC loan documents

When you’re ready to apply, it’s best to gather the required LLC loan documents the lender will want to see, including:

• Personal information. Name, addresses, resume, income sources and contact information for both you and the company’s co-owners.
• Company information. Your company’s name and address, tax ID or EIN number.
• Company financials. Generally includes a combination of two years of balance sheets, profit and loss statements, cash flow projections, income tax returns and business bank account statements.
• Legal documents. Articles of incorporation, business licensing and proof of business insurance.
• Business plan. A document detailing how you intend to use the funds and the financial benefit they’ll provide to your company.

Some lenders may request additional documents. And if you’re offered a secured loan, you’ll also need to provide information about the collateral. Inquire with the lender to determine what you’ll need in advance to avoid processing delays.

6. Apply for your LLC loan

You can find an LLC loan through a variety of lenders. Online lenders allow you to complete the entire application process online and upload supporting documents for review. You’ll most likely receive a decision in just within minutes or by the next business day.

A traditional bank lender may take several days to a few weeks to provide a decision, especially if you have to apply for the loan in person. The waiting period is often longer for SBA loans. However, banks often have the lowest interest rates, and building a relationship can improve your chances of securing future financing.

Upon approval, the lender will prepare documents for you to review and sign. Once the loan documents are processed, funds will be disbursed to you. The funding timeline varies by the loan product and lender you select.

LLC loan fees

It’s equally important to run the numbers to find the best deal on LLC financing. You may find that the lender offering the lowest interest rate isn’t necessarily the cheapest option if it charges a steep origination fee, and if you plan to pay the loan off early, a prepayment penalty tucked away in the fine print could send your borrowing costs soaring. 

Here are some common small business loan fees to look for:

• Origination fee. Many lenders charge between 1% and 5% of the loan amount when you open a loan to cover the administrative costs.
• Late payment fee. If one of your payments is late, the lender often charges a steep fee.
• Early repayment fee. Also called a prepayment penalty, some lenders charge a fee if you pay off your loan early.
• Servicing fee. There may be an ongoing fee to cover administrative costs.
• Credit check fee. Some lenders charge a credit report fee to obtain a copy of your credit report.
• Underwriting fee. A lender may charge a fee for the loan underwriter to review your application and prepare the loan documents.

Alternatives to LLC loans

If an LLC business loan doesn’t seem like the right fit for your business, consider an LLC loan alternative.

• Business grants. A business grant is a free funding source that does not have to be repaid. Business grants are also available to businesses that fall into a specific category, like minority-owned or women-owned companies.
• Crowdfunding. Crowdfunding is a way to source smaller donations from a large number of individuals to fund a certain project or business idea. These individual investors may get a reward in exchange for their donation, such as equity in the business.
• Business credit cards. Business credit cards operate like traditional credit cards and allow you to re-use the funds, up to the credit limit, as you make payments. Some cards come with additional perks, such as promotional interest-free periods and rewards programs.

Bottom line

Getting an LLC business loan requires that you follow several steps to find the right loan and lender. There are several types of LLC loans, so it’s a good idea to research the different types to determine which would be best for your business. Consider the loan amount you need, interest rates, fees and repayment terms available.

Then, compare several lenders before you pick one, and make sure you meet all its requirements. When you are ready to apply, gather the necessary documents. Then, apply either online or in person and wait to hear if you are approved.

If you decide an LLC loan isn’t right for your business, there are other options. Consider alternatives like business credit cards, business grants or crowdfunding.

Frequently asked questions

• What happens if your LLC loan is denied?

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  If your application is denied, you may not be entirely out of luck. Start by reaching out to the lender to learn why your application was rejected and gain insight on what you can do to improve your approval odds moving forward.

  You may have to look at different types of loans. You may be a strong candidate for a business loan for bad credit, which will likely have higher interest rates. Also, consider alternative lenders. Online lenders and peer-to-peer lenders tend to have less stringent eligibility guidelines. You may even want to try a crowdfunding platform, which involves raising small sums of capital through donations or investments in your company.

  If all else fails, it’s a good idea to take some time to improve your credit health if it’s one of the reasons why you were denied financing.

• Do you need an LLC to get a business loan?

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  Not necessarily. If you operate as a sole proprietor, you could also be eligible for a business loan. But your options may be limited to online lenders and private lenders, as some traditional banks and credit unions are hesitant to lend to sole proprietors.

• Is it hard to get a business loan with an LLC?

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  If you have good credit and can meet the lender’s eligibility guidelines, getting a business loan with an LLC can often be easy. But new businesses and companies with limited revenue may have difficulty getting approved, especially with traditional banks and credit unions. You may have to seek financing with an alternative lender, which could come with higher interest rates and strict repayment terms.

• How does an LLC business loan work?

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  It depends on the type of LLC loan you select. Some LLC business loans are installment loans disbursed in a lump sum and payable over a set period. Others are revolving lines of credit that operate like credit cards and can be used on an as-needed basis.

• Is it easier to get a business credit with an LLC?

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  Yes, it can be easier to get business credit with an LLC. Some lenders won’t lend to sole proprietors. Establishing your business as a legal entity can make it easier to access financing and could even help lessen lender bias, as a recent study in the Journal of Marketing Research suggests.