LLC Loans: Everything You Need to Know

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Loans for Limited Liability Companies (LLC) are not much different than other types of business financing, but there are issues that need to be considered. The primary reason for setting up an LLC is to separate your personal assets from the company or to have limited liability. If the business fails to pay its debts your personal assets are untouchable. Or are they?

There are a few exceptions regarding personal liability in an LLC business organization. Your personal assets may be confiscated to pay your debts if:

  • 1. You Co-sign or otherwise personally guarantee an LLC Business Loan.
  • 2. You pledge personal assets as collateral.
  • 3. The LLC corporation was involved in fraud.
  • 4. Creditors seek to “Pierce the Corporate Veil” through the courts.

 

While the top three conditions are self-explanatory, the fourth requires further explanation due to its importance when looking to finance your business with LLC loans.

Creditors can petition the court to waive limited liability if:

  • If the owners don’t keep a clear distinction between personal and corporate finances. For example, using corporate funds to pay personal bills.
  • The LLC owners fail to follow the articles of organization.
  • The company has insufficient start-up capital to operate the business while incurring debt it can’t realistically repay.

 

It’s worth your while to consult an attorney about potential personal exposure before securing loans for an LLC.

Financing Options for an LLC

As you can see from your internet search there are several business financing options. Your search may also signal that you’ve approached your bank and they weren’t quite ready to issue a loan to your Limited Liability Company. It’s a common occurrence. We hear it all the time.

Ever since the Financial Crisis banking institutions have been stingy when it comes to issuing B2B business loans to small and medium companies. Fortunately, other forms of business financing have arisen to provide funding to the economic engine of the U.S. economy.

There are several options for funding from start-up capital, leasing office space, and buying new equipment to cash for operating expenses, bulk purchases of inventory, or capital for a new business opportunity/expansion.

Private Equity

Private equity goes by many different names such as angel investors, equity partners, and venture capitalists. Whatever name they present themselves as they all want a percentage of your business in return for their investment. Many also want a seat at the corporate table to have a say in how the business operates. Barring those conditions, it’s a perfectly acceptable business financing option for some companies. Its how Apple, Google, and Twitter secured the financing to get their start-up off the ground.

But finding an equity investor takes time and they are primarily interested in companies with explosive growth potential. For some business owners, the loss of independence in how the company is run is a deal breaker. Your time may be better used in quickly obtaining working capital and increasing your sales.

Working Capital Loans for LLCs

Even if sales are increasing and profit is up doesn’t mean that a company has enough liquid cash to funds its operation. Some customers are notoriously slow to pay invoices to small and medium businesses. Or possibly, your sales are not uniform throughout the year and you need to buy inventory for the upcoming busy season. Maybe an important piece of equipment breaks down, or a new delivery van is needed. Whatever the reason there are business financing options to keep your company humming along.

Let’s first define working capital. Many business owners confuse cash flow with working capital. Even though you may have cash in bank, you may not have enough to cover operating expenses going forward.

To determine your working capital:

  • Calculate current assets for the 12-month period that can be liquidated to pay current liabilities.
  • Subtract current liabilities that are due during the next 12 months.
  • If the calculation is negative, the business has a potential working capital problem.

Advantages of Working Capital Loans for an LLC

The primary advantage of working capital LLC loans over bank loans is the approval process. Banks are notoriously rigid in processing a loan application taking several weeks, if not months, and they refuse 40 to 50% of applicants. Meanwhile debts are piling up, payroll must be met next week, and you’d like to be able to pay yourself a salary to put food on the table. Even if you’re confident to be approved, you may still need a short-term loan to cover expenses or as it’s called “bridge financing.”

Working capital online loans for LLCs normally take a day for approval and don’t require near the documentation as bank applications. Four to six months of LLC bank statements to prove your cash flow, recent federal tax returns, and the LLC tax ID and your set to go. Cash can be deposited in your bank account in just a few days.

3 Working Capital Loans for LLCs

Invoice Factoring for LLCs

If you’ve been in business for a while and have accumulated unpaid customer invoices, you can pledge them as collateral for a business loan.

One form of invoice factoring involves assigning the value of the invoices to the lender or factor. The lender then advances you a discounted amount valuing 75% to 90% of the invoices face value. The customer then pays the invoice to the lender. After interest is deducted, the lender forwards any balance left over.

The second form of invoice financing for LLCs is known as discounting. It’s similar to the first except that customer invoices are paid to your company and then forwarded to the factor to relieve the debt. There are interest charges and maintenance fees to consider.

Inventory Loans for LLCs

In the U.S., 51 percent of business owners take out loans to bolster their inventory. They are particularly useful for wholesale and retail operations. Small and medium manufacturers can also benefit if financing is needed for a large order, for example.

Many wholesale and retail operations have uneven sales revenue throughout the year. Seasonal businesses often experience ups and downs in the sales cycle. But operating costs still must be paid whether business is good or bad. In order to prepare for a busy season, a company may not have enough funds available to purchase the inventory needed to take advantage of future profit.

Inventory loans are short-term financing options for LLCs to purchase inventory. The purchased inventory is then used as collateral for the loan. As the inventory is sold, the business owner pays back the loan plus interest.

To qualify for an Inventory Loan, you’ll typically need the following:

  • A full accounting of of the company’s financial history
  • A forecasted set of financial statements
  • A comprehensive loan application
  • An agreement to be audited (if applicable)

 

If all is in order, the funds can be deposited in just a few days. Once the loan is paid back per the terms, future loans will be easier to achieve.

Merchant Cash Advances for LLCs

A merchant cash advance is based on your company’s future earnings. The lender analyzes monthly sales, normally 3 to 6 months, and estimates future earnings. It’s particularly useful for retail operations and professional service organizations that are predominately paid by credit card and Interact. The lender then enters into a partnership with your merchant account providers to deduct a set percentage of your daily receipts. You can also arrange to have an agreed upon amount taken from your company’s bank account via Automated Clearing House (ACH).

This type of business financing offers flexibility based on your company’s business patterns. Because the repayment is tied to sales receipts, you pay more when business is good and less when business is slow. There are no conditions on how you spend the cash advance.

 

How to Qualify for a Merchant Cash Advance

The only qualification for Cash Advance LLC loans is verifiable proof of at least $10,000 per month in bank deposits and credit card receipts. Because the advance is approved based on future sales bad credit scores will not result in being turned down for approval. Roughly 90% of Merchant Cash Advances are approved.

Documents Required:

  • Driver’s License
  • 4 – 6 months of bank and credit card processing statements
  • LLC tax returns
  • Voided business check for the LLC

 

You won’t pay interest on the cash advance. These types of LLC loans use factor rates to calculate the premium paid on the loan. Factor rates can range from 1.14 to 1.48. A $10,000 cash advance at a factor rate of 1.2 will require you to repay $12,000. Your company’s daily payment is based on a retrieval rate assigned by the lender. A 10% retrieval rate on $5,000 in daily sales will result in a payment of $500 for the day.

As with any business financing decision, business owners should consider all their options. There are a wide variety of LLC loan options to consider. Be sure to keep your personal and business transactions completely separate to protect personal assets. Good luck.

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