How to manage an LLC loan
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If your business is structured as a limited liability company (LLC), an LLC loan can help cover many of your needs. Whether you’re trying to get a new business off the ground, improve cash flow at your well-established LLC or consolidate business debt, the right LLC loan can be a useful tool.
Finding and getting approved for an LLC loan are two of the main challenges many small business owners face. But once you’ve found the best LLC loan for you, you also need to manage it well to ensure you get the most value out of the funds you receive and avoid falling into debt or defaulting on the loan.
Keep reading to learn more about LLC loans and how to manage them.
What is an LLC?
An LLC loan is a business loan taken out by a limited liability company. LLCs function differently than other business entity types like C and S corporations. An LLC is designed to help protect its owners. When you operate as an LLC, creditors should only be able to seize company assets, not your personal ones.
Unfortunately, one way lenders get around this is by requiring business owners to sign a personal guarantee. Once you sign that document, you essentially void your personal liability protection. That means a lender has the right to come after your personal assets if you fail to pay back your business loan.
That’s why it’s important that you know how to manage your LLC loan and avoid going into default.
How to manage an LLC loan
Once you figure out how to get an LLC loan, you can’t apply a set-it-and-forget-it mentality just yet. Actively managing this debt means staying on top of your payments and putting the money you borrowed to the best possible use for your business. To best manage your LLC business loan, follow these steps.
Understand the loan terms
Specifically, read through the entire loan agreement to make sure you understand the following:
- The loan amount (how much you borrowed)
- The loan term (how long you have to pay it back)
- The repayment schedule (how much you own to the lender and when)
- The business loan collateral (what you put up to secure the loan)
- The interest rate and whether or not it fluctuates (fixed vs. variable interest rate)
- The grace period (if any) for late payments
- Any associated fees, like a prepayment fee if you pay off the loan early
If you’re not sure what something in the loan documentation means, ask your lender for clarification. The last thing you want is to set an aggressive repayment plan for yourself only to find out that paying off the loan early lands you with a hefty fee. Or worse yet, you could discover that your interest rate is variable when you thought it was fixed.
Read through your loan documentation carefully. This is one place where surprises most definitely aren’t welcome.
Have a budget
Just like any other debt, business loans for a new LLC or a longstanding one require regular repayment. A business budget helps you keep track of your income and expenses. This can make it easier for you to manage your business loan.
To create a business budget, examine your revenue. You may be able to do this based on your most recent months of accounts receivable, but you’ll also need to account for seasonal changes and slow periods. From there, you’ll need to determine your fixed costs and variable expenses, which get subtracted from your income.
If you’re not a fan of doing the math, business budget software can go a long way to making it easy for you to create and keep an eye on your budget.
Make on-time payments
Missing payments on LLC loans will cost you, as your lender will most likely charge a late payment fee. That could be either a flat rate or a percentage of your missed payment. Some loan terms may specify that both are an option, and the lender will charge whichever is greater.
Beyond that, missing payments will impact your credit score. If you ever need to borrow money in the future, a worse credit score means paying more in the form of a higher interest rate.
To make sure you don’t miss a payment, you have some options. First, if your lender offers it, establish autopay. This allows the lender to automatically draw your monthly payment from one of your business accounts, preventing an inadvertently missed payment.
Even if you do put your LLC loan on autopay — and especially if you don’t — set up a recurring calendar reminder for a few days before your payment date. If you’re paying the loan manually, this gives you enough time to make the payment. And if you’re on autopay, it lets you check your account to make sure it has sufficient funds to cover what the lender will draw.
Watch your credit
Depending on the type of loan and the lender, your payments will be reported to the major credit bureaus. Some lenders may report to personal credit bureaus; others may report to business credit bureaus like Dun & Bradstreet.
To avoid surprises, periodically check your credit score. If you notice any errors, dispute them. Doing so should improve your score.
Some lenders don’t report to credit bureaus. If building credit is important to you, make sure to check to see if they report to credit bureaus and whether they report to personal credit bureaus, business credit bureaus or both.
Get help if needed
If you think you might miss a payment, reach out to your lender before that payment date. Lenders want you to be able to pay back your loan and may work with you if you’re in a tight spot.
If your lender doesn’t help you, you can explore refinancing your business loan or using a business consolidation loan. While these options might be able to help you out of a tight spot, they usually come with loan origination fees or one-time costs to establish the loan.
Ultimately, you don’t want to miss an LLC loan payment, so start exploring your options well before that happens. If the loan goes into default because you miss a payment for too long, it can tank your personal and business credit scores and — depending on the terms of your loan — mean the seizure of company or personal assets.
With business loan options ranging from term LLC bank loans with fixed interest rates to business lines of credit, you have ways to improve cash flow at your business. But you need to be ready to pay back what you borrow or you could compromise not just your company but also your personal finances.
Frequently asked questions
That depends on your business. Remember, all loans come at a cost: the interest and fees you’ll pay. Determine if your company truly needs that money or if you are eligible for alternative forms of financing like business grants or crowdfunding.
Properly managing your business debt keeps your company and yourself in good financial standing. Making your payments on time can help build your credit. Missing payments, on the other hand, could mean the seizure of company or personal assets, depending on the terms of your loan.
If you fail to pay a business loan, a lender will typically try to work with you, setting up a plan to pay off the loan. If this doesn’t work, you’ll go into default. If you signed a personal guarantee or provided collateral, your lender has the right to seize assets. Your credit score will also drop. Late payments and defaults will show up on your credit report for up to seven years or longer, making it harder for you to get financing in the future.