What is an LLC Loan and How Does It Work?

AsiaVision/Getty Images; Illustration by Issiah Davis/Bankrate

Many entrepreneurs choose a Limited Liability Company (LLC) structure due to many benefits, which include protecting their personal assets if the business ever defaults on a loan payment or is being sued by a creditor. When corporate counselors were surveyed, 82 percent of surveyed corporate counselors said their companies were involved in at least one lawsuit in 2024. That’s one reason why people may choose to operate as a limited liability company (LLC).

An LLC can help protect your personal assets in case of a lawsuit. If you need the funds to help with operations, LLC loans can help with cash flow, hiring staff or investing in other opportunities.

What is an LLC loan?

An LLC loan is any business loan that provides funds for small businesses organized as limited liability companies. An LLC loan isn’t a specific type of loan that you’ll find offered through lenders. Instead, they are business loans found at traditional banks, credit unions and online lenders. The U.S. Small Business Administration (SBA) may also back some LLC business loans.

Types of LLC loans

The best LLC loans help you cover your most pressing business-related expenses. There are several types of LLC loans:

Some LLC loans will be secured, which means you’ll have to provide some type of asset that will help secure the loan. Business collateral can make it easier to get a loan with more favorable terms since the lender is taking less of a risk to loan you money and can seize your company’s assets if you fail to pay back the loan. There’s no collateral requirement for unsecured loans.

Personal guarantees

One of the main disadvantages of an LLC loan is that many lenders will also require a personal guarantee. This will usually void the liability protections you normally get when establishing your business as an LLC. Once you sign a personal guarantee, you are personally liable for paying back the loan if your business fails. If you default, the lender can come after your personal property and assets.

What are LLC loans used for?

LLC small business loans are often used to foster business startup, growth, expansion efforts and even consolidating business debts. Most lenders require applicants to disclose how they intend to use the funds. Here are some of the ways business owners most commonly leverage their loan funds:

It’s important to note some lenders restrict how you can use the LLC loan funds. You also can’t use business loan proceeds for personal expenses.

How to qualify for an LLC loan

Before applying for an LLC loan, follow these steps to help improve your chances of getting approved.

Build business credit

Lenders may look at personal and business credit scores when you apply for funding. You can boost your approval odds by building good credit before you submit your application. You can do this by paying bills on time and paying down balances on revolving credit accounts. If you need financing quickly, you can get a bad credit business loan, though it will come with steep borrowing costs.

Understand LLC loan requirements

The eligibility guidelines vary by lender. Here’s what you’ll generally need to qualify for a business loan:

• Annual revenue: Most lenders have a minimum annual revenue requirement, typically anywhere from $50,000 to $250,000 or more, depending on the lender and loan type. Banks are more likely to require a higher minimum revenue, while online lenders may require as little as $36,000 in revenue to get started.
• Time in business: Many lenders also require a certain amount of time in business to qualify for funding. It’s generally between six months and two years, but some offer startup business loans if you’re a new LLC business and need funding.
• Credit score: A good or excellent credit score (FICO score of 670 and above for personal credit) improves your chances of qualifying for a loan with competitive terms.
• Industry: The industry your company operates in should be stable and offer growth potential. (Some lenders have a list of prohibited industries, including gambling and cannabis).
• Documentation: Prepare to provide personal and financial documents when you apply for a business loan. This includes financial disclosures and any applicable business licenses.

Traditional banks and credit unions generally have more stringent requirements and slower funding times than online lenders but tend to come with lower rates and higher loan amounts. The flexibility of online lenders may come at a cost in the form of higher interest rates and fees.

Develop a business plan

Lenders want reassurance your company is likely to succeed and that you can successfully manage LLC loan repayments. They also want clarity on how you generate earnings and how you plan to use the funds to grow your operation.

Put your best foot forward by devising a solid business plan, which dives into these matters and breaks down financial projections. Business plans typically include the following:

• Executive summary
• Company description
• Market research about the types of products or services your company provides
• Detailed descriptions of your products or services
• Your overall marketing strategy
• Financial projections
• Why you’re requesting LLC funding and how you plan to use the money

Traditional banks and credit unions usually require a business plan as part of the LLC business loan application process. Online and other lenders may not, but it might help improve your odds of getting approval for the full loan amount.

Offer collateral

Some LLC loans come with collateral requirements. Collateral reduces the amount of risk for the lender, because they can seize it if you default on your loan to recoup their investment. If you have a low credit score, you are more likely to be required to put up collateral to get approved for funding.

Common types of business collateral include business equipment, real estate, investments and cash.

How to get an LLC loan

Once you’ve established yourself as a loan-worthy business, you can work on setting up the loan itself:

• Calculate the amount of debt you can afford
  

• Compare lenders
  

  Try to prequalify and get quotes from at least three different lenders to see which has the best rates, fees and terms for your business needs.

• Gather your loan documents
  

  You will likely need personal information like your name, address and income, your company information, business plan and legal documents.

• Apply to the loan
  

  Online lenders may take only a few minutes to a day to offer a decision, but wait times may be longer with banks or SBA loans.

Bottom line

A small business loan geared for LLCs could be ideal for your business. Before applying for an LLC loan, compare the loan types, assess the benefits and drawbacks and run the numbers to calculate how much of al loan you can afford.

Also, research several lenders and get loan quotes to find the best deal on financing. Most importantly, ensure you meet the lender’s guidelines. Doing so helps boost your approval odds so you can secure the funds you need.

Frequently asked questions

• Does an LLC affect your personal credit score?
  

  An LLC loan can affect your personal credit score, as lenders often check your personal credit during the application process. It may also affect your credit if you sign a personal guarantee for the loan. In this case, your personal credit will take a hit if you default on the loan.

  Making on time payments and paying the loan in full could boost your personal credit score.

• Do you need good credit for an LLC loan?
  

  A good credit score is ideal for getting an LLC loan, but some lenders will approve you for a loan with less-than-perfect credit. For example, if you get a loan with a bank lender, you’ll likely need a personal credit score of 670 or above. Yet online lenders may accept FICO scores as low as 400, though the usual minimum credit score is around 600.

• Who is liable for an LLC loan?
  

  The company is liable for the debt unless you cosign the LLC loan or provide a personal guarantee. If you do either, you become personally liable if the business defaults on the loan.

• Can an LLC get an SBA loan?
  

  Yes. LLCs are eligible to apply for SBA loans as long as they are eligible businesses. Ineligible businesses include non-profits, life insurance companies, businesses located outside the U.S. and consumer or lending businesses.