What makes an LLC loan different than a regular small business 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.

Is it easier to get a loan as an LLC vs. a sole proprietorship?

Small business financing will become more accessible if you go from a sole proprietorship to an LLC. Some small business lenders do not provide financing for sole proprietorships, so you will instantly have more options with an LLC.

It’s also easier to build business credit with an LLC. A higher business credit score will help you qualify for more loans and receive better rates. You can start an LLC even if it’s just you, so there is no need for LLC partners if you already do everything solo.

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. 
• Waiting for partners to approve your request for a loan: If you run an LLC with partners, you need their approval before you can take out an LLC loan. It’s an extra hurdle that precedes the actual loan application.

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

• Do LLCs get loans easier?

  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.
  

• Do banks loan money to LLCs?

  Yes, banks loan money to LLCs as long as they meet their requirements for business loans.
  

• Do I need an LLC to get a business loan?

  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.