Legally speaking, a limited liability company (LLC) is a separate entity from its owners. Because of this, it can enter into contracts, own property, and borrow money from a bank.
Read on to learn how your LLC can get the bank financing it may need to succeed.
How Can My LLC Qualify for Financing?
Like an individual, your LLC must meet bank requirements to qualify for a bank loan. Your LLC needs to have a good credit history. If you have business credit cards or loans for which payments have been made on time, or other types of business financing in good standing, your business should have a good credit score.
Banks will also want to look at your financials to ensure the business makes enough money to repay the loan. They may also look at the LLC’s assets and request some as collateral for the loan.
If your LLC does not qualify based on all this, the bank may offer to approve the loan if you or other LLC owners, known as members, personally guarantee the loan. In this case, your personal credit history will become a factor in the approval process.
This is standard practice, but you must be aware of the liability. Your LLC’s liability does not apply to a personally guaranteed loan. However, if the LLC is unable to make payments, you will be required to pay it personally.
The bank may also require your LLC to have been in business for at least two years and have a certain income level, usually between $50,000 and $250,000, before approving your loan.
Types of Loans
There are several types of loans your LLC may be able to get. Here are your options.
Bank loans generally offer the most favorable rates, terms, and loan amounts but are often the most difficult to qualify for. Most banks offer business loans, but your best bet will be to apply at the bank where you already do business.
Small Business Administration (SBA) loans are loans guaranteed by the SBA, a federal agency, and funded through lending partners such as banks. The SBA guarantee protects the lender, not the borrower, ensuring that the lender will recover some of their funds in the event of loan default.
SBA loans have favorable terms and are a bit easier to qualify for than bank loans, but the approval process can take some time. The 7(a) loan is the most common SBA loan, providing up to $5 million with terms of up to 25 years.
Business Line of Credit
With a line of credit, your LLC can draw funds from the line as needed, make payments, and accrue interest based only on the funds used. Repayment terms are typically about 18 months.
Businesses often use lines of credit as emergency funds or during seasonal downtimes. Line of credit amounts range from $10,000 to $1 million, and the qualification process is similar to that of a bank loan.
Many online lenders provide business loans and business lines of credit. They are generally easier to qualify for, and the process is quick, but rates and terms tend to be less favorable than those of bank and SBA loans.
How to Obtain a Loan
Before you apply for any financing, determine precisely how much you need and what payments you can afford. You don’t want to get into a situation in which your business cannot make payments, especially if you have personally guaranteed the loan.
After nailing down a financing plan, you’ll want to:
- Decide which type of financing is right for you. You can get estimates online or from your bank for your potential payments based on the amount you need.
- Select a lender based on the type of financing you’ve chosen. For example, most banks that offer business loans also offer SBA loans and lines of credit.
- Gather all the documentation required for the application, including bank statements, financial statements, and tax documentation. You may also need your articles of organization and a certificate of good standing.
- Submit your application and provide any additional information the lender requires.
- Your final step will be your loan closing. After that, you’ll sign the loan documents and get your funds.
Your LLC is its own financial and legal entity, and this can get a loan from a bank. But to qualify, your business must prove its worth and be capable of repayment. This is often difficult for startups.
If your business is new, you’ll likely be asked to guarantee it personally if you apply for a loan. However, before doing so, take the time to ensure you’re willing to take the risk, and provide backup financing should your business default.
In the meantime, it’s always a good idea to continue building your business and strengthening your business credit so that, at some point, your business will qualify for significant bank financing on its own.