Understanding Why You Should Form an LLC
LLCs provide several advantages to belittled occupation owners :
- LLCs are a “separate legal entity” from you, which means they have their own assets, liabilities, bank accounts, etc.
- LLCs can reduce your personal liability to debts incurred by the LLC, although providing a personal guarantee to a lender will remove this shield.
- LLCs can have their own credit histories and credit scores, in addition to your personal history and score.
- Taking the time to form an LLC shows that you’re serious about business and can help when it comes to getting customers, working with banks, and finding suppliers.
- In some cases, an LLC can provide tax advantages with the IRS.
Creating an LLC Before Applying for a Loan
You will need to legally create an LLC before borrowing money. Forming an LLC is agile and easy, and you can either do it yourself or use one of the many company formation services .
- Find out what agency is responsible for forming businesses in your state. For most states, this will be your secretary of state.
- Gather together information about your business and file “Articles of Organization” to legally form your LLC.
- Once your LLC is formed, get a separate bank account and complete any other steps like getting an Employer Identification Number.
Establishing Why You’re Borrowing and How Much Your LLC Needs to Borrow
Before applying for a loanword, you ’ ll indigence to ask two important questions :
- Why does my LLC need this money?
- How much money does my LLC need?
Lenders will want to know what your LLC is using the money for. This might include :
- Expanding into new products, services, and marketplaces
- Increasing your inventory to meet customer demand
- Investing in employees, assets, or equipment
- Refinancing existing debt for better terms and interest rates
- Increasing your working capital to maximize opportunities
- Buying or renting real estate
once you know the function of a loanword, you ’ ll want to carefully work out precisely how much to borrow. This will involve thick inquiry into your chosen area, projecting future demands and costs, analyzing your LLC ’ s fiscal position, and speaking with experts .
Creating a Strong Foundation for Your LLC Loan
Lenders rely on across-the-board software documentation and reports to decide if they want to lend to your LLC. One of the most common reasons belittled business loans are turned down is a miss of supporting information and tell .
Requirements do change by lender, but we ’ ve listed some common ones below.
Financial Documents for an LLC Loan
You can get the necessity fiscal documents from your accountant and your bookkeeping software :
- A balance sheet that lists what your LLC owns and owes at a particular point in time
- A profit and loss report that shows where your LLC revenue is coming from, your expenses, and the profit you have left over.
- A cash flow statement that shows how money is moving through your LLC
- Detailed projections of your future revenues, expenses, and profits, based on multiple future scenarios
- Account statements for your LLC like bank and credit card transactions
- Tax returns for you (pass-through income from your LLC on your 1040) and your LLC (1040 Schedule C)
- Your debt schedule and repayment plan if you already have loans
Business Documents for an LLC Loan
The more corroborate evidence in your LLC business documents, the better. This includes :
- Basic facts about your LLC like its name, address, industry, locations, etc.
- An operating agreement for your LLC that shows how various aspects of the business are managed
- An LLC business plan that details areas including a business overview, operations plan, sales and marketing plan, competitive market analysis, product and service overview, financial plan, projections, and a management team summary
- Any legal contracts and agreements you have in place with other third parties
Other Helpful Factors for an LLC Loan
There are respective other areas that will maximize your chances of getting an LLC loanword :
Read more: What Is a Debt Management Plan? – NerdWallet
- Business licenses and operating permits for your LLC
- Your LLC’s Employer Identification Number (EIN)
- A strong personal financial history and credit score, as this shows you’re good at managing your own money, which can translate to responsible business management
- A business history and track record that shows how your business has survived and grown—a history of at least two to three years will give you the best chance
- A business credit score
Collateral, Personal Guarantees, and LLC Loans
It ’ south significant to understand how business or personal collateral, guarantees, and liens will impact your ability to get an LLC lend. LLC loans with collateral are secured, while loans without collateral are unbarred .
- Collateral is an asset or combination of assets that the lender can seize and sell if you fail to make repayment on your loan. Collateral might include your business or personal bank accounts, inventory, equipment, vehicles, or real estate.
- A personal guarantee is an agreement with a lender that says you will be personally responsible for your LLC’s debts if the LLC defaults on that debt. This normally means that your personal assets will be liable if you don’t make repayments.
- A blanket lien means a lender can lay claim to any or all of your small business assets if you default on your loan. With a blanket lien, you don’t need to define your collateral upfront, but all of your assets are liable to be seized and sold up to the total value of your loan.
It ’ randomness identical significant to note that the liability protection offered by an LLC does not apply if you make personal guarantees or otherwise agree that your personal assets can be used to settle the libra of an unpaid loanword .
Matching Your LLC Financing with the Right Lender
If you need a loanword for your LLC, we can help. Our specialize loanword marketplace matches your occupation needs with the right lenders to get you low-cost financing and help your LLC thrive .