A limited liability company (LLC) is a business structure offering protections to small business owners. When forming an LLC, you shield your personal assets from liability for business debts and obligations.

An LLC loan could be a viable option if you operate as an LLC and need funds for your business. While there are plenty of advantages to securing a loan, in most cases, an LLC business loan may require you to give up your protections. Before you try to get an LLC loan, here’s a look at the pros and cons of LLC loans.

Pros

LLC businesses are a popular funding solution for small business owners — and for good reasons.

Access to funds

According to the tech market intelligence platform CB Insights, the number one reason small businesses fail is that they run out of cash or fail to raise new capital. But an LLC can help cover your needs, from filling cash flow voids when expenses exceed profits to providing access to cash when you experience a downturn in your business. LLC loan proceeds are often used to:

  • Start or grow a business
  • Improve cash flow
  • Purchase inventory
  • Consolidate debt
  • Cover unexpected expenses
  • Purchase equipment

Flexible options

LLC loans are available through traditional banks, credit unions and online. There are several flexible options to choose from for just about any type of LLC, including:

If you’re seeking a rapid funding solution, some online lenders offer loan approvals the same business day. You could also receive loan proceeds as soon as one business day.

Build credit

Some business loans can help build business credit if the lender reports account activity to the business credit bureaus and you manage the loan responsibly. It’s not uncommon for traditional banks and credit unions to report payment activity. Financial institutions may also report business loans to personal credit bureaus.

Keep in mind that some alternative lenders don’t report to the credit bureaus. This is often the case for merchant cash advances, invoice financing and invoice factoring. Make sure you check with a lender to see if they report to credit bureaus and ask which bureaus they report to.

Cons

Even the best LLC loans have some disadvantages to consider.

Personal liability

Although an LLC helps protect your personal assets from liability for business debts, lenders often circumvent this barrier by requiring a personal guarantee.

When you sign a personal guarantee, you agree to assume personal liability for repaying the loan if your company cannot make the payments. That means a lender can come after your personal assets if your business fails to repay the loan.

Can be expensive

The lowest interest rates on LLC loans are generally reserved for borrowers with good-to-excellent credit scores. A lower credit score generally means you’ll pay more to access funding. The rates are exceptionally high for bad credit business loans, including merchant cash advances, invoice factoring and invoice financing.

If you get a business line of credit, you could still spend a fortune in interest, even if you have excellent credit. The interest rate may be variable, so even if it starts out low, it could increase significantly as market conditions change.

Limited disclosure requirements

Consumer lenders are required to disclose the annual percentage rate (APR) to borrowers on consumer loans per the Truth In Lending Act. This information must be provided when you apply for a loan or credit card product and helps you understand borrowing costs to expect.

But this rule does not extend to business loans. Lenders aren’t required to display their rates and fees on their websites. They also don’t have to provide APRs and can instead use simple interest or factor rates, which can make it harder for business owners to compare lenders.

Bottom line

An LLC loan can help your business flourish if you’re turning a profit but need additional funding to take advantage of growth opportunities. Be sure to compare the different types of LLC loans to determine which could work for your company and evaluate the pros and cons of each.

Frequently asked questions

  • An LLC loan is any type of business loan open to limited liability companies. They can be found at banks and credit unions as well as alternative lenders like online and direct lenders.
  • Most traditional banks and credit unions prefer established LLCs with at least two years in business and credit scores in the good-to-excellent range. But online lenders have more relaxed eligibility requirements that make business loans accessible to people with poor credit and limited time in business. The downside is that these loans usually come with higher interest rates.
  • Good credit helps you qualify for the best financing terms. Qualifying for an LLC loan with bad credit is still possible, but you’ll generally have small loan amounts and higher borrowing costs.