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Key takeaways
- LLC business loans are similar to regular business loans, but they cater to LLCs
- Common loans available to LLCs include SBA loans, term loans and business lines of credit
- A personal guarantee may still be required for an LLC loan
Many business owners form limited liability corporations (LLCs) to separate their personal assets from their business assets. If you want to fund your LLC, you have many business loan options.
Most lenders don’t create specific loan products for LLCs. Rather, LLC loans are small business loans that allow LLCs to apply for and receive funding. While there are many protections and tax benefits to forming an LLC, you may still have to put personal assets on the line when you apply for an LLC loan.
LLC loan vs. business loan
What makes LLC loans different from regular small business loans is that LLCs apply and use them. You don’t need to look for a loan that is labeled as an LLC loan, and unless the terms of a loan explicitly state otherwise, you can apply to any small business loan as an LLC.
Similar to a regular small business loan, the LLC loan can be secured or unsecured, and funds can be used for various business needs, such as startup expenses, equipment purchases and working capital. That said, not all LLC loans are the same, and the approval and documentation requirements can vary.
Can you get a business loan without an LLC?
While LLCs commonly secure loans, you can get a business loan without an LLC. Other business structures, such as sole proprietorships, partnerships and corporations, also qualify for financing and, in many cases, the same types of loans available to LLCs are available to most other businesses, including:
- SBA loan: SBA loans are backed by the U.S. Small Business Administration and have fairly strict requirements but low rates.
- Term loan: A term loan is a loan where all funds are distributed at once. Most small business loans fall into this category, no matter the lender.
- Business line of credit: A revolving line of credit, typically with a draw period and a repayment period.
Bankrate insight
LLCs may also want to keep a business credit card on hand. They are flexible forms of financing that can cover a variety of short-term costs. They’re also one of the best ways to build business credit since you can avoid interest charges when you keep your balance paid off each month.
LLC advantages and disadvantages
When applying for a loan, there are some pros and cons to being an LLC.
Advantages of LLCs
- Personal asset protection: Your personal assets can be protected against many creditors by forming an LLC.
- Tax advantages: Many corporations are taxed at the business and partner level, while an LLC is usually only taxed at a member level.
- Credibility: Depending on your industry, putting in the effort to form an LLC may help you gain some credibility with lenders over simply being a sole proprietor.
Disadvantages of LLCs
- Lack of resilience: Since LLCs are managed at the state level, regulations vary greatly. However, in some states, if a member of the LLC leaves or dies, the LLC must be dissolved and a new one formed.
- Protection loopholes: There are some ways that an LLC does not fully protect personal assets as much as other types of corporations. This includes loans with personal guarantees.
Does forming an LLC protect you against personal guarantees?
A personal guarantee is a common clause in small business loan contracts. It’s a legal promise that if your business becomes unable to fulfill payment obligations, the lender can come after your personal assets to get their money back.
Will an LLC protect you against a personal guarantee? The short answer is no. A personal guarantee allows lenders to circumvent the liability protections that your LLC usually provides. If your LLC defaults on the loan, prepare to use your personal savings or other assets to make good.
While personal guarantees are very common among small business loans, you can also compare LLC loans to look for other collateral options.
Bottom line
Most business loans allow LLCs to apply for funding. Unless the terms of the loan state otherwise, you can apply for a business loan from banks, credit unions and online lenders as an LLC. Be sure to compare terms carefully, particularly as it relates to personal guarantee clauses, to make sure your business is as protected and you find the best LLC loan for your business.
Frequently asked questions
Approval for business loans for LLCs is based on several factors, including minimum credit score, annual revenue, time in business and industry. If an LLC is well established, getting a business loan may be easier.
Yes, banks loan money to LLCs as long as they meet their requirements for business loans.
No, your business doesn’t need to be an LLC to get a business loan. Business loan lenders approve various types of businesses for financing, including corporations and sole proprietorships.
FAQs
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.
What is the difference between a loan and a business loan? ›
Business loans can offer a longer repayment period than personal loans, depending on the lender. For example, the Sofi personal loan we mentioned earlier and the JP Morgan Chase business loan have the same maximum term of seven years. However, SBA 7(a) loans can have repayment periods of up to 25 years.
What is the difference between a personal loan and a business loan? ›
A personal loan helps meet the personal financial requirements of an individual, such as paying off medical bills, or buying a car. A business loan helps to finance business operations or expansion, purchase inventory, equipment or to bridge cash flow gaps.
What's the difference between an SBA loan and a regular business loan? ›
Types of SBA Loans
SBA loans are especially valuable when business owners cannot secure funding from other sources. They come with the benefit of interest rate caps, longer loan amortization and the ability to access capital with less equity than a conventional loan.
What is the difference between a customer loan and a business loan? ›
Understanding the differences between business and consumer loans is crucial for individuals and entrepreneurs seeking financial support. While business loans aid business-related expenses with larger amounts and longer tenures, consumer loans cater to personal needs with smaller amounts and shorter repayment periods.
What happens if I use a business loan for personal use? ›
If a lender finds out about a business owner using a business line of credit for personal use, they will call in the balance of the note. Furthermore, financial penalty may be taken against the offending party.
What makes a business loan? ›
Business loans provide business owners with financing either as a lump-sum payment or credit line. In exchange for this funding, your business agrees to repay the money it borrows over time, plus interest and fees.
What is the big difference between personal finance and business finance? ›
As a general rule, business financial planning tends to be more complex. Unlike financial planning for you or your family, planning for your company involves more people, different tools and technology, and considerations that aren't necessary for personal finances—such as payroll and inventory management.
Do business loans show up on personal credit? ›
Business loans do not typically show up on your personal credit report unless the bank reports it to credit bureaus as personal lending under your social security number. Normally, your personal credit report shouldn't be impacted by a business loan, even if you've personally guaranteed the loan.
Can a personal loan be used to buy a business? ›
Yes, depending on the lender, there are restrictions on how you can use a personal loan. Occasionally, lenders may not allow a loan to be used for business purposes. There could also be other restrictions, which will be laid out in the loan agreement.
Drawbacks of SBA Loans
Less competitive rates and terms versus banks. Generally, the most competitive interest rates are available through traditional bank loans, though SBA loans do often offer lower costs than some online lenders. Long approval times. SBA loans can take a long time to fund, up to two to three months.
Is it hard to get a SBA business loan? ›
Eligibility requirements
Normally, businesses must meet SBA size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding. The lender will provide you with a full list of eligibility requirements for your loan.
What is a typical business loan interest rate? ›
Business loan interest rates typically range from 6% to 99% APR. According to the most recent data from the Federal Reserve, average rates on business bank loans fall from 6.13% to 12.36%.
How does a business loan differ from a personal loan? ›
Business loans typically have higher lending limits and may require collateral, with approval depending on business financials and information. On the other hand, personal loans have more flexibility in how funds can be spent, have shorter repayment periods and use personal information for approval.
What's the difference between a small business loan and a commercial loan? ›
Use of funds: SBA loans require using proceeds for qualified business purposes. Some commercial loans are more flexible. Cash flow: Commercial loans require the ability to handle higher monthly payments. SBA offers longer terms.
Is it better to get a business loan or use your own money? ›
If you don't want your personal assets to be at stake, a business loan without a personal guarantee is going to be a better option than a personal loan. Some alternative lenders may offer loans with no personal guarantee. If you want to build your business credit, a business loan can help you do that.
What is the disadvantage of business loan? ›
One of the biggest drawbacks of taking out a business loan is the potential for high interest rates. Loans may come with higher interest rates than other forms of financing, which can increase the total cost of borrowing. Taking out a business loan also comes with the risk of default.
Are business loans better rates than personal loans? ›
Lower interest rates: While loan terms are based on several factors, business loan rates are generally lower than personal loan rates. As of late 2023, the median business loan rate is 7% compared to the national average personal loan rate of 12.17%.
Does a business loan go on your credit? ›
A business loan can affect personal credit. If you personally guarantee a business loan, your credit will be affected. If you're a sole trader or run a partnership, your finances will also be affected by a business loan. In such instances, your credit scores will reduce if your business delays payments or defaults.
