How to compare LLC loans
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A limited liability company (LLC) is a type of business structure that gives small business owners some protections against being held personally liable for company debts and obligations.
LLCs account for 35 percent of small businesses and are more popular than S corporations (33 percent), corporations (19 percent) and sole proprietorships (12 percent). That’s according to data from the National Small Business Association.
Like any small business, LLCs often need capital to keep operations afloat or expand. But before applying for a small business loan, here are some tips that can help make you a strong candidate for approval and ensure you’re getting the lowest rates and best terms possible.
How to compare LLC loans
You can get an LLC loan at traditional banks, credit unions and online lenders. There’s no shortage of options. But to find the right LLC loan for you, you’ll need to consider the following factors.
Type of LLC loan
There are many types of LLC loans. The most common include:
- Term loan. Business term loans let you borrow a lump sum of cash that you repay in monthly installments with interest. Short-term loans typically offer fast access to cash but come with short repayment terms of three to 24 months. There are also long-term loans that offer higher amounts of financing and longer repayment terms, typically three to 10 years.
- Business line of credit. This is a revolving line of credit that works like a credit card. You can withdraw the funds you need, up to the credit limit, on an as-needed basis. And unlike term loans, you’ll only pay interest on the amount you spend.
- SBA loan. These loans are backed by the Small Business Administration and come with lower rates and competitive terms. However, you can expect a challenging application process and slower funding times than you’ll find with other business loans.
- Invoice factoring. When you work with an invoice factoring company, you trade in your unpaid invoices for cash. You could receive an advance of up to 85 percent of the invoice value. When your invoiced client pays the invoice, it’s collected by the factoring company, which then disburses any remaining funds to you, minus fees.
LLC loan amount
How much funding do you need? The answer to this question will help determine which type of LLC loan is best for your company. Term loans can have business loan amounts that range from $2,000 to $5 million, but lines of credit are generally capped at $250,000.
SBA loans also come with varying loan amounts. For example, the SBA microloan program offers loans up to $50,000. SBA Express loans max out at $500,000. And the standard SBA 7(a) loans are capped at $5 million.
If you’re considering invoice factoring as an option, remember the loan amount you can access depends on the invoiced amounts owed to you.
Minimum requirements to qualify
There are many business loan requirements to watch out for when comparing LLC loans. Most lenders have a minimum credit score, time in business and annual revenue requirements. Some also evaluate current debts, obligations and business credit scores to determine if your company qualifies for funding.
Generally, traditional banks’ term loans and lines of credit have the strictest qualifications. SBA loans are a bit more accessible since you can get approved with a credit score as low as 640, despite the complex application process. But if you need a business loan with minimal requirements, online lenders tend to be more lenient.
Interest rates and fees
Interest rates on LLC loans vary by the lender and loan type. The best rates are typically reserved for small business owners with good credit.
If the interest rates offered with an unsecured business loan seem high, a secured business loan may offer better rates. But you’ll have to sign over some form of asset that acts as collateral in case you don’t pay the loan back. For those who don’t qualify for business loans with good credit there are business loans for bad credit, but you’ll have to watch out for the high interest rates and increased fees.
Borrowers get a fixed rate that remains the same during the loan term or a variable rate that fluctuates over time. Lenders have a few ways of showing the cost of borrowing.
- Annual percentage rate (APR). The APR shows you the total cost of borrowing — both the business loan interest rate and fees.
- Annual interest rate (AIR). AIR shows you the interest you’ll pay each year on the loan but doesn’t account for fees.
- Factor rate. Typically found with alternative loans like merchant cash advances, the factor rate is a decimal figure representing the total borrowing costs.
There are also fees that often come with business loans. The most common to watch out for include:
- Origination fee. It is an upfront expense that covers loan processing and underwriting costs associated with reviewing the application to make a lending decision.
- SBA guarantee fee. The Small Business Administration charges a fee of 0.25 percent to 3.75 percent of the amount it guarantees.
- Late payment fee. Expect a late payment fee if you make a payment after the due date or grace period offered by the lender.
- Early repayment fee. This is a prepayment penalty a lender may charge for paying off business loans early.
- Servicing fee: This fee is sometimes charged by lenders to cover administration-related costs.
The repayment period for business loans varies depending on the lender and type of loan. More extended repayment periods generally mean you’ll get a more affordable monthly payment, though you’ll pay more interest since the lender has more time to collect from you.
|LLC loan type||Repayment term|
|Term loans||Up to 10 years|
|Business lines of credit||Up to 5 years|
|SBA loans||Up to 25 years|
|Invoice factoring||Varies by invoice payment term, usually up to 90 days|
How soon do you need the funds for your business? A term loan or business line of credit from an online lender is worth considering if it’s soon. But if you can wait a bit, consider applying through a traditional bank or credit union, which may offer a better rate.
On the other hand, SBA loans are known for their slow funding speeds and aren’t ideal for small business owners who need cash immediately. It could take several weeks to get a lending decision, and the funding timelines are just as lengthy.
Pros and cons of LLC loans
LLC business loans have benefits and drawbacks you should consider when deciding if they’re a good fit for your business.
- Improved cash flow. You can take out an LLC loan to fill cash flow voids and keep operations running smoothly or to grow your business.
- Build business credit. If the lender reports payment activity to the business credit bureaus, your company’s credit health could improve assuming you make timely loan payments.
- Accessibility. With so many types of business loans and alternative lenders, business loans are more accessible than they have been in the past.
- Lengthy application process. Online lenders generally feature a streamlined application process, but this may not be the case if you apply for an LLC loan with a traditional bank.
- Potentially high rates and fees. Unless you have good or excellent credit, your borrowing costs could be significantly higher.
- Personal guarantees are common. Most lenders require a personal guarantee on small business loans, which means you’ll be personally liable for repaying the loan if your business defaults on the loan agreement — even if you are an LLC.
How to get a business loan with an LLC
Once you understand how LLC loans work and which is best for your business, chances are you’re ready to apply for funding. But before moving forward, take these steps to give yourself the best chance at getting approved for a loan:
- Check your credit score. Lenders may look at your business and personal credit scores and credit reports. You’ll generally need good or excellent credit to apply for a term loan or business line of credit. If you choose an online lender, you could get approved with a lower credit score, as the guidelines tend to be a bit more lenient.
- Run the numbers. Use a business loan calculator to determine how much loan you can afford. If your credit score is low, the interest rate will likely be higher and drive up the monthly payment.
- Compare lenders. Get loan quotes from at least three different lenders. Compare interest rates, fees, loan terms and funding timelines. Ideally, you want to select the lender offering the best deal on financing.
- Gather documentation. From personal information to business plan, there are a number of documents and information needed to apply for a business loan.
- Apply for an LLC loan. Most lenders offer online applications, but you may have to visit a physical location if you’re applying with a bank or credit union. Online lenders offer decisions in minutes or hours. You’ll likely have to wait longer if you apply with a traditional lender.
If approved, review the loan documents carefully before you sign on the dotted line. The lender will then close the loan and disburse the proceeds to you.
Before applying for an LLC loan, you’ll need to compare the options available to you to find the best fit. By evaluating the loan amounts, eligibility guidelines, interest rates, fees, loan terms and funding speed, you’ll have the knowledge to make the right decision for your company.
Frequently asked questions
It’s possible to get a business loan with a new LLC. But your options may be limited. Most lenders require you to meet a minimum time in business requirement unless you have other compensating factors, like a higher credit score, to minimize the risks they’ll incur by lending to you.
Yes, you can get an SBA loan with an LLC assuming you meet all the eligibility requirements. You’ll also need to provide a personal guarantee that makes you liable for the loan if your company cannot repay what’s borrowed.
It depends on which financial institution offers the most attractive terms. Credit unions are known for offering better rates and lower fees than traditional banks, but loan amounts tend to be smaller.