New LLC Loans: What You Need to Know
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As a new business owner, securing funding can pose quite a challenge. Traditional lending programs are typically designed for well-established businesses with two years of solid performance. However, that doesn’t mean there aren’t any options available. In this article, we’ll discuss how to secure new LLC loans, how to qualify for them, and other essential factors to consider before applying.
What Is an LLC Loan?
LLC loans are regular installment loans like any other traditional lending style. A potential borrower first applies with a lender for financing. If approved for a specified amount of money, the borrower must pay back the lender in fixed monthly payments. The total cost of borrowing includes the initially requested amount, interest rate charges, and any added lending fees.
The difference between a traditional loan and an LLC loan is that the LLC itself is considered the borrower – not the business owner. As such, the LLC is liable if a debt goes unpaid – not the business owner.
Taking out a loan under an LLC instead of a personal loan generally protects the business owner’s assets. If a loan goes into default, the lender can only retrieve the LLC’s assets for debt recovery instead of the borrower’s personal accounts.
The exception to this is when a business has not yet built up enough credit and financial history to qualify for a business loan under the LLC’s name. In this case, a business owner will need to provide a personal guarantee removing any liability protection provided by the LLC.
In other words, taking out a loan under the LLC will provide no greater protection than taking out a personal loan in the business owner’s name.
What Is a Limited Liability Company (LLC)?
A limited liability company, commonly referred to as an LLC, is a legal entity in the United States that entrepreneurs can form to start and begin their own business. The primary purpose of an LLC is to protect business owners and investors from personal liability for the company’s debts or legal matters. Limited liability companies are allowed under state statutes with rules and regulations varying between states.
LLC owners, or “members,” and many states don’t provide any restrictions on who or what a “member” must be. Individuals, other LLCs, corporations, and foreign companies are all permitted to be LLC members. Notable exceptions to the rule are banks and insurance companies – they cannot form or become members of any LLCs. LLCs are the most common business structure used in real estate to own commercial or rental properties.
For tax purposes, limited liability companies usually follow the pass-through taxation structure—business owners “pass-through” the LLC’s profits or losses to their personal tax returns. Any profits are then taxed at the owner’s individual income tax rates.
Funding Options for New LLCs to Consider
When it comes to business financing for your LLC, several different lending options are worth considering.
SBA loans are obtained from banks and credit unions and guaranteed by the Small Business Administration. Because of the guarantee, SBA loans can be challenging to get approved for. However, if you manage to qualify, it will be one of the lowest cost options for borrowing you’ll likely find.
Merchant cash advances are a style of lending that is generally easier to qualify for than small business loans. These are alternative funding methods where a business borrows money from its future self; they are not loans.
Merchant cash advance lenders provide a lump sum of money upfront for daily or weekly payments automatically deducted from the business bank account. Payments are calculated based on a percentage of earnings from sales.
Approval for merchant cash advances is based upon overall business health and earning potential rather than credit history. This lending style is beneficial for LLCs who have not yet established the solid financial and credit histories required to qualify for traditional small business loans.
Term business loans are available through banks, credit unions, and alternative lenders, similar to SBA loans. Term loans are traditional installment loans. A lump sum of money is transferred to a borrower and repaid in fixed monthly payments over a predetermined amount of years.
Substantially low-interest rates and long-term repayments over 3 to 10 years make this financing option very popular for small businesses looking to purchase new commercial properties or equipment. To qualify for a small business term loan, companies must demonstrate solid financial history with several years’ worth of satisfactory business performance.
Business lines of credit function similarly to credit credits. LLCs can apply for a business line of credit and gain access to a set amount of revolving funds that can be used, paid down, and used again. The lender sets credit line limits based upon credit history, income level, and business earning potential. Interest rates are higher than term or SBA loans which can potentially increase the total cost of borrowing. Despite the increased cost, taking out a business line of credit is generally much easier than qualifying for a loan.
Lastly, limited liability companies can open a business credit card account to gain access to additional purchasing power. Recurring administrative charges, licensing fees, bulk supply purchases, client business meals, employee uniforms, and fuel are some expenses that would typically be charged to a business credit card. When you pay your credit card balances in full each month, you can avoid the interest rates associated with credit cards.
How to Get a Business Loan for an LLC
Create a Strong Foundation
It is never too early to build a solid history for a newly formed LLC. Opening a business bank account and credit card can help develop a satisfactory record of healthy financial management from the very beginning. Create a business plan and make sure to revisit it often. Many online lenders and bank loan programs will also ask to see a business plan.
Gather Required Financial Documentation
Certain financial documents will need to be attached and filed when applying for a loan. This often includes revenue projections, profit/loss statements, bank statements, and previous tax returns.
Getting into the habit of keeping meticulous records throughout the year as standard practice can help make this process much less tedious.
Ensure Permits and Licenses Are Current
Depending on your LLC’s industry and location, different licenses and permits may be required. In addition, lenders will require proof of compliance with necessary licenses and permits as part of their application process.
Be sure to check in with federal, state, and local government agencies periodically to ensure your LLC complies with current regulations.
Establish Strong Business History
Building a solid business history should be at the top of a business owner’s to-do list during all phases of the development journey. In addition, having a solid financial record will help an LLC qualify for the best and most competitive interest rates when any form of outside financing is needed. The more time in business, the more likely your limited liability company will be to qualify.
Maintain a Good Credit Score
Suppose a business owner wishes to seek future financing under an LLC’s name. In that case, business credit history will become an essential factor for potential lenders.
The easiest way to develop a business’s credit history is to charge a small recurring expense to your new LLC credit card. Set up payment preferences to have the statement balance paid in full every month via autopay. This ensures the development of an active credit account with perfect payment history and responsible debt management.
Once you believe your LLC is in good standing, it’s time to start the application process. Determine which LLC business loans may be able to help you get to the next level, and start applying for business loans! Depending on the lender and type of funding you’re applying for, expect the process to take anywhere from a couple of days to a few months before receiving funds.
Why Do LLCs Need Business Financing?
Limited liability companies can seek outside business financing for a multitude of reasons. Buying inventory stock, advertising campaign fees, employee payroll, expansion activities, real estate acquisitions, and purchasing new equipment are common reasons business owners seek financing under an LLC’s name. Taking out a loan, merchant cash advance, or line of credit under the LLC protects the members from personal liability claims if the debt falls into default.
New LLC Loan Frequently Asked Questions
Are LLC Loans Secured or Unsecured?
LLC loans for small businesses can either be secured or unsecured. Secured loans require the presence of collateral to secure the loan amount in case an account becomes delinquent. Unsecured loans do not require additional assets but are associated with higher interest rates due to increased lender risk.
Who Is Eligible to Apply for Small Business Loans for New LLCs?
Anyone can apply for new LLC business loans, but not everyone will get approved. However, new LLCs that have recently formed may find it challenging to get approved for loans within the first two to three years of doing business. Alternative financing methods like merchant cash advances, credit cards, and business lines of credit may be easier to obtain until a satisfactory track record develops.
Can I Get Approved for a New LLC Loan With Bad Credit?
New LLCs are automatically at a disadvantage due to a lack of business operating history. Before building a business credit history, lenders rely on personal credit scores for financing applications. Large and small business owners with bad credit are better off applying for alternative funding solutions. Merchant cash advance applications focus on overall business health and earning potential, not credit history. This makes it an attractive option for new business owners or those with bad credit to engage in credit repair and improve their scores.
How Hard Is It to Get a New LLC Loan?
Approval rates for new LLCs applying for business loans are very low. To be approved by traditional lenders, you must meet strict eligibility criteria. New LLCs will automatically fall short with minimal business and credit history to rely on.
How Fast Can I Get Funded for My LLC Loan if I’m Approved?
Traditional bank or credit union loans can take several weeks to process an application and additional time (if approved) to fund the borrower. With small business loan approval rates in the 15% range, alternative lending options may be more realistic until an LLC has a solid business and credit history.
Funding Your Business Is Our Business
LLC Loans in Summary
Taking out a business loan under an LLC can offer business owners additional protection from personal liability. Beginning from the startup phase, developing a solid foundation is vital for acquiring future opportunities.
If your LLC requires funding before the two or three-year mark, alternative financing methods like merchant cash advances, business lines of credit, and credit cards are viable options to get started until traditional lender criteria can be met.
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