Can an LLC Take Out a Loan? – Avoid These Costly Mistakes + FAQs

If you’re running an LLC and need funds to grow, you’re not alone. But can an LLC take out a loan like an individual would? Nearly half of small businesses (around 43%) turn to loans to fuel growth, showing how common this question is.

Can an LLC Take Out a Loan?

Yes – a limited liability company (LLC) can absolutely take out a loan in its own name. In the U.S., an LLC is a separate legal entity with the ability to borrow money, enter contracts, and incur debt just like an individual or corporation. Banks and other lenders regularly provide loans to LLCs for startup costs, expansion, equipment purchases, and other business needs.

When an LLC takes a loan, the company is responsible for repaying it. This means the loan is legally owed by the business, not by you personally as the owner. However, many lenders will still evaluate your personal credit and may ask you (as the business owner) to personally guarantee the loan—especially if your LLC is new or small. In short, your LLC can borrow money, but be prepared for the lender to scrutinize both the business’s finances and possibly your own, to ensure the loan will be repaid.

Key Terms: LLCs and Loans Explained Simply

Before diving deeper, let’s define some key terms in plain language. Understanding these will help make sense of how LLC loans work:

• Limited Liability Company (LLC): A business structure that creates a separate legal entity for your business. In simple terms, an LLC separates your personal assets from your business’s debts. If the LLC owes money, creditors usually cannot come after your personal belongings (house, car, etc.) for payment.
• Limited Liability: This is the main feature of an LLC. It means owners (called members) aren’t personally responsible for business debts or lawsuits. If the LLC defaults on a loan, the lender can pursue the LLC’s assets, but generally not the owners’ personal assets — unless a personal guarantee or other arrangement bypasses this protection.
• Loan (Business Loan): Money that a business borrows from a lender with the agreement to pay it back later, usually with interest. The LLC receives a sum of money now and agrees to repay the amount over time (plus interest, which is the cost of borrowing). Loans can be obtained from banks, credit unions, online lenders, or other financing companies.
• Collateral: Any asset of value that is pledged to secure a loan. For example, an LLC might use a piece of equipment, a vehicle, or real estate as collateral for a loan. If the LLC cannot repay the loan, the lender has the right to take (seize) the collateral to recover the money. Secured loans require collateral, which often leads to better terms (lower interest) since the lender’s risk is lower. Unsecured loans have no specific collateral backing them; these usually require strong credit or higher interest rates to compensate for the lender’s risk.
• Personal Guarantee: A legal promise by an individual (such as an LLC’s owner) to repay a business loan if the business itself cannot. When you sign a personal guarantee for your LLC’s loan, you’re effectively saying that you’ll cover the debt with your personal funds or assets if the LLC fails to pay. This guarantee gives the lender extra security, but it also means your personal credit and assets are on the line despite the LLC’s limited liability structure.
• Business Credit Score: A number that represents your company’s creditworthiness, separate from your personal credit score. It’s based on the LLC’s financial history, such as past loans, payment history to suppliers, and credit accounts. Lenders may check your business credit score (if your LLC has one) in addition to your personal credit. A strong business credit score can help an LLC qualify for loans on its own merits, with less emphasis on personal guarantees.

Understanding these terms sets the stage for how LLC loans operate. Essentially, your LLC can borrow money, and limited liability offers some protection – but things like collateral and personal guarantees can still tie the loan to you personally. Next, let’s look at some real-world examples of LLCs taking out loans to see how it works in practice.

Real-World Examples: LLC Loans in Action

To make this more concrete, here are three real-world scenarios showing how an LLC might take out a loan and what that looks like:

1. Startup LLC needs equipment: Imagine you started a small catering LLC and need $10,000 for a commercial oven and food trailer. Since your business is brand new with no revenue yet, traditional banks are hesitant. You secure an equipment loan in the LLC’s name, but the lender asks for a personal guarantee (because the LLC has no credit history). You agree and use the oven and trailer as collateral. The LLC gets the funds to buy the equipment, and over the next few years, the business repays the loan from its sales. You, as the owner, only become personally responsible if the business fails to pay. This way, your startup LLC obtains the needed equipment upfront to start generating income.
2. Growing LLC opens a second location: Now consider a retail LLC that’s been operating for 3 years successfully and wants to open a second store. The company needs a larger loan, say $250,000, for the new location’s lease, renovations, and inventory. With steady revenues and profit from the first store, the LLC applies for an SBA-backed loan (Small Business Administration loan) through a bank. Thanks to the business’s solid financial statements and a detailed business plan, the loan is approved. The SBA guarantees a portion of it, which convinces the bank to lend to the LLC at a low interest rate over a 10-year term. The LLC uses the money to expand, and the new store’s income is used to make the monthly loan payments. The owners did sign personal guarantees (a common SBA requirement), but because the business is doing well, it repays on time and everyone’s personal assets remain untouched.
3. Established LLC manages cash flow with a line of credit: Consider an LLC that runs a seasonal business – for example, a landscaping company that earns most of its income in summer and much less in winter. To cover off-season expenses (like equipment maintenance and staff training) and to have cash ready for spring ramp-up, the LLC obtains a business line of credit from a bank for $50,000. This line of credit works like a safety net: the company can draw funds as needed (up to the $50k limit) and only pays interest on the amount it uses. No personal guarantee was required this time because the LLC has a strong track record and assets as collateral. In the winter, the LLC draws $20,000 to cover costs, then pays it back in the summer when cash flow is strong again. This flexible loan keeps the business running smoothly through seasonal ups and downs, and the LLC’s good credit history meant the owners didn’t have to involve their personal credit at all.

These examples show that LLCs of all sizes and stages use loans for various purposes – from launching operations to expanding and managing cash flow. Each scenario is different, and the loan structure adapts to the LLC’s situation. The first case needed an owner’s guarantee and collateral for a startup loan, the second leveraged an SBA program for expansion, and the third used a revolving credit line to handle seasonal needs.

To summarize the above scenarios, the table below illustrates the three popular LLC loan situations, the typical loan options used, and key considerations for each:

Financial and Legal Perspectives on LLC Borrowing

When considering an LLC loan, it helps to look at it from two angles: the financial perspective and the legal perspective. This way, you can see not only the money side (costs, benefits, risks) but also how laws and regulations apply to your LLC when it borrows money.

Financial perspective: From a financial standpoint, taking out a loan can be a smart strategy for an LLC under the right circumstances. Loans allow your business to access capital for growth without giving up ownership (unlike selling equity). For example, if buying a new piece of machinery or opening a new location will increase your LLC’s profits, a loan can provide the upfront funds to make it happen, and the future profits can pay off the debt. Many successful businesses use leverage (borrowed money) to expand faster than they could using only existing cash.

However, loans also introduce financial risk. Your LLC will have a new fixed expense — the loan payment — that it must pay on time regardless of how the business is doing. Before taking a loan, an LLC should analyze its finances: Will the business be able to comfortably make the monthly payments from its cash flow? It’s wise to be conservative here. If your projections show that repaying the loan will be tight, consider borrowing less or waiting until revenue grows. Additionally, factor in the cost of interest. The interest rate on the loan determines how much extra you pay back beyond the principal. For instance, a $100,000 loan at a 5% annual interest rate means you pay about $5,000 per year in interest — money that isn’t going into your business. Always compare the expected return on investment (ROI) from the loan (e.g. increased profits due to expansion) with the cost of the loan (interest and fees). A healthy business loan should have the ROI outweigh the costs. On the flip side, too much debt can hurt your LLC’s financial stability, so it’s important not to over-borrow. Lenders will also look at your company’s debt-to-income ratio or debt-to-equity ratio to assess if you’re taking on too much debt relative to your earnings or assets.

Legal perspective: Legally, an LLC has the power to borrow money and enter into loan agreements under U.S. law. When your LLC takes out a loan, the loan contract is between the LLC and the lender. This is important because, thanks to the LLC’s limited liability, the lender generally can only pursue the LLC’s assets if the loan isn’t repaid. Your personal assets (house, car, personal bank accounts) are protected by law unless you’ve made additional agreements that say otherwise (like a personal guarantee). This legal separation is one big reason business owners form LLCs in the first place.

However, in practice, lenders often require that extra assurance. Personal guarantees and collateral agreements effectively bypass the LLC’s liability shield. If you sign a personal guarantee, you are legally on the hook to pay the loan if the LLC cannot. Similarly, if you pledge personal property (say, your house or personal car) as collateral for the LLC’s loan, the lender can go after that property even though it’s not owned by the LLC. It’s crucial to understand these terms before signing. You don’t want to be caught by surprise thinking “it’s the LLC’s debt, not mine,” only to realize you signed a clause that makes it your responsibility too.

Another legal aspect is ensuring the proper authorization for the LLC to borrow. If you’re the sole owner, this is straightforward — you decide and sign for the LLC. In multi-member LLCs, the Operating Agreement might require a vote or consent of other members to take on significant debt. Make sure to follow whatever process your LLC’s rules or state law require to authorize the loan; it keeps everything above board and enforceable. When signing loan documents, always sign as an authorized representative of the LLC (e.g. “Jane Smith, Managing Member, XYZ LLC”) rather than just your name. This makes it clear the LLC is the borrower, and you’re signing on the company’s behalf. If you just sign your name without the title or company name, a lender could later argue you signed personally for the loan.

In summary, the legal perspective emphasizes protecting yourself by understanding what you’re agreeing to. The LLC structure gives you a layer of protection, but real-world loan agreements often include clauses that can make you personally responsible. Always read the loan contract carefully (and consider legal advice for large loans) so you know your obligations. With both the financial and legal factors in mind, you can approach LLC borrowing as an informed business owner, balancing the growth opportunities against the costs and risks.

Comparing Different Loan Options for LLCs

LLCs have a variety of loan and financing options available. The best choice depends on your company’s age, size, creditworthiness, and specific needs. Here’s a comparison of the most common loan options for LLCs, along with their advantages and drawbacks:

• Traditional Bank Loan: This is a standard term loan from a bank or credit union. You receive a lump sum and repay it with interest over a set period (e.g. 5, 10, or 15 years). Pros: Usually offers the lowest interest rates and favorable terms if you qualify, making it cost-effective. Cons: Banks typically require a strong credit history, solid business financials (profitability, revenue), and often at least 2 years in business. The application process can be slow and paperwork-heavy, and approval is not guaranteed for newer or smaller LLCs.
• SBA-Backed Loan: These are loans offered by banks but partially guaranteed by the U.S. Small Business Administration (SBA). Common programs include the SBA 7(a) loan (for general small business purposes) and the SBA 504 loan (for buying real estate or equipment). Pros: SBA loans feature relatively low interest rates and long repayment terms (sometimes 10-25 years), making monthly payments more affordable. They are designed to help small businesses that might not qualify for a regular bank loan, so the SBA guarantee encourages banks to lend. Cons: The application process is thorough – you’ll need to provide detailed financial statements, a business plan, and sometimes collateral. Approval can take several weeks or months. There are also fees associated with SBA loans, and you will almost always need to sign a personal guarantee.
• Online/Alternative Business Loan: These loans come from online lenders or fintech companies rather than traditional banks. They can be short-term loans, installment loans, or merchant cash advances (repaid via a percentage of sales). Pros: Much faster and easier approval – many online lenders can fund a loan in a few days with minimal paperwork. They often work with newer businesses or those with lower credit scores that banks might reject. Cons: The convenience comes at a cost: interest rates and fees are usually higher than bank loans. The repayment terms are often shorter (e.g. 6 to 18 months for short-term loans), which means larger frequent payments. Always check the APR (annual percentage rate) – some alternative loans can have very high effective APRs.
• Business Line of Credit: A line of credit is a revolving account that lets your LLC borrow up to a certain limit (say $50,000) as needed. It works similar to a credit card but typically with lower rates and without the plastic card. Pros: Extremely flexible – you draw funds when you need cash and pay interest only on the amount you’ve drawn, not the entire credit limit. Great for managing cash flow, handling emergencies, or bridging short-term gaps (like paying suppliers while waiting for customers to pay invoices). If you repay what you borrowed, those funds become available to use again (revolving credit). Cons: Lines of credit often require an established business with a decent track record and credit history. The lender may ask for a personal guarantee and/or collateral. Also, the credit line might come with annual fees or maintenance fees. It’s important to use discipline: just because funds are available doesn’t mean you should max it out – only borrow what your business truly needs and can repay.
• Equipment Loan (Equipment Financing): This is a loan specifically used to purchase equipment or machinery, and that equipment usually serves as collateral for the loan. For example, an LLC might get an equipment loan to buy a delivery van or manufacturing machine. Pros: Since the equipment itself secures the loan, these can be easier to obtain for a business with limited credit history – the lender knows they can repossess the asset if you default. Interest rates are often reasonable and similar to auto or mortgage loans, and terms often match the life of the equipment (3-7 years typically). Cons: The use of funds is restricted – you must use it for the equipment specified. If the equipment loses value faster than the loan is repaid, you could end up paying for something no longer useful. Also, if you default, the equipment is taken, which could hurt your business operations.
• Business Credit Card: A credit card for your LLC can act as a short-term loan for smaller expenses. Pros: Easy to obtain (often based on your personal credit score when the business is young) and convenient for everyday purchases. It also helps build your business’s credit profile if you consistently pay on time. You only pay interest if you carry a balance month to month, and many cards offer perks like cashback or travel points on business spending. Cons: Interest rates on credit cards are generally high (often 15% to 25% APR). Carrying a large balance on a business credit card can become expensive if not paid off quickly. Also, the credit limits might be relatively low compared to loans (depending on your creditworthiness, you might only get a few thousand dollars limit initially). Most business credit cards require a personal guarantee, meaning the card issuer can hold you personally responsible for the debt if the LLC doesn’t pay.
• Merchant Cash Advance (MCA): While not a traditional loan, an MCA is a financing option where a lender gives an advance sum of money in exchange for a percentage of the business’s future sales (often daily credit card sales) until the advance and fees are paid back. Pros: Very easy to get – MCA providers care mostly about your sales volumes, not credit scores, so even LLCs with poor credit or short histories can obtain funding. Funding is fast, and payment is automated (a portion of your sales is taken daily or weekly). Cons: MCAs are one of the most expensive financing options. The effective APR can be extremely high (sometimes 50-150% or more) because of the fees and short repayment period. Since payments are a percentage of sales, a slow sales week doesn’t get you off the hook — they’ll just take a bigger slice of what you do bring in. Over-relying on MCAs can trap a business in a cycle of debt. They should be a last resort for most LLCs, used only when you need money urgently and can’t qualify for other loans, and even then with a plan to pay it off quickly.

Each of these options has its place, and sometimes an LLC will use several over its lifetime. For example, you might start with personal funds and a business credit card, later qualify for an SBA loan as you grow, and maintain a line of credit for flexibility. The key is to match the loan to your needs: short-term needs with short-term financing, long-term investments with longer-term loans, and avoid high-cost debt if you have lower-cost alternatives.

Common Mistakes to Avoid with LLC Loans

While LLCs can and do successfully use loans to grow, there are common mistakes and pitfalls that business owners should avoid. Being aware of these can save you from financial trouble and legal headaches down the road. Here are some frequent mistakes when it comes to LLC borrowing, and how to avoid them:

• Mixing personal and business finances: Keep your business loans and expenses separate from personal finances. For instance, avoid using a personal credit card to cover LLC expenses (or vice versa) without proper records. Mixing funds not only complicates accounting but can also weaken your liability protection (in severe cases, courts might “pierce the corporate veil” and hold you personally liable if you don’t clearly distinguish business from personal transactions). Use dedicated business bank accounts and credit lines for your LLC.
• Not reading the loan terms carefully: It’s crucial to understand the fine print of any loan agreement. Don’t just focus on the monthly payment—look at the interest rate, whether it’s fixed or variable, the term (length of the loan), and any fees (origination fees, prepayment penalties, late fees). Also check for clauses about personal guarantees or collateral. If something is unclear, ask the lender or a legal advisor. Many mistakes happen when business owners skip the details and later find out the interest rate jumps after a year, or that there was a hefty closing fee deducted from the loan amount. Always know what you’re signing up for.
• Borrowing more than the LLC can afford: It can be tempting to take a larger loan if a lender offers it, but you should stay within your means. Over-borrowing is a common pitfall — it can lead to monthly payments that strain your LLC’s cash flow. If sales dip or an unexpected expense comes up, an overly large loan payment can put your business in a dangerous position (even to the point of missing payments or default). To avoid this, create a realistic budget and financial projections before borrowing. Only take the amount of loan that your business can comfortably pay back even in a downside scenario. It’s better to start with a smaller loan and pay it off successfully, which can build your credit for a larger loan later, than to struggle with debt that’s too big.
• Assuming “no personal risk” because of the LLC: Don’t fall into the trap of thinking your LLC status alone shields you from all personal risk on a loan. Limited liability protects you legally, but most lenders will require a personal guarantee for small businesses. This means if your LLC can’t pay, you are personally on the hook. Even without an official guarantee, if you pledge personal assets as collateral, those assets are at risk. Always evaluate the worst-case scenario: if the business fails or cannot repay the loan, can the lender seize something from you personally? If you want to avoid personal guarantees, you’ll need to build up the LLC’s own credit and financial strength over time; until then, recognize the personal obligations you may be accepting.
• Not shopping around for the best terms: Another mistake is taking the first loan offer you get without comparing options. Interest rates, fees, and terms can vary widely between lenders. For example, one bank might offer a 8% rate on a loan while an online lender offers 12% for the same profile, or vice versa depending on their criteria. Always explore multiple sources: your own bank, other banks, credit unions, online lenders, and SBA options. Compare the annual percentage rate (APR) and the total repayment cost. Negotiating is sometimes possible too – if you have a better offer from one lender, you can ask another to beat it. By shopping around, you could save a lot in interest and find a loan that fits your business best.
• Lacking a clear loan repayment plan: Taking out a loan without a clear plan on how the business will use it and pay it back is risky. Sometimes owners borrow money hoping it will “somehow” boost the business, but they haven’t identified a solid revenue-generating use for the funds. Before you borrow, tie the loan to a specific purpose (e.g. “to buy X which will increase our production by Y, leading to Z more revenue”). Then map out how and when you’ll repay from those expected gains. Also consider building an emergency reserve or backup plan for making payments if the expected growth takes longer than anticipated. Having a well-thought-out plan means you’re borrowing for the right reasons and with a realistic strategy to pay it off.

Avoiding these mistakes will help ensure that taking out a loan truly benefits your LLC. Loans are a tool: used wisely, they can propel your business forward; used carelessly, they can create setbacks. Stay informed, be prudent with borrowing, and your LLC can leverage loans while minimizing risks.

FAQ: LLC Loans and Borrowing

Q: Can my new LLC get a loan with no revenue?
A: Yes, but you’ll likely need to personally guarantee it or provide collateral since the business has no track record. Lenders want assurance the loan will be repaid.

Q: Do I have to personally guarantee an LLC loan?
A: For most small or new LLCs, usually yes. Lenders almost always require the owners to sign a personal guarantee unless the business is very established with strong finances.

Q: Will an LLC loan affect my personal credit?
A: Not if you avoid personal guarantees and keep the debt solely in the LLC’s name. But if you personally guarantee or co-sign the loan, any missed payments or default can appear on your personal credit report.

Q: What is the easiest loan to get for my LLC?
A: Often a business credit card or an online short-term loan. These usually have simpler approval requirements than traditional bank loans (but often come with higher interest rates).

Q: Can I use a personal loan to fund my LLC?
A: Yes, you can take a personal loan (or use personal credit) and put the money into your LLC. However, that loan will be in your name, not the LLC’s, which means you are personally liable for paying it back. It also doesn’t help build credit for your business since the debt isn’t in the LLC’s name.

Q: What happens if my LLC can’t repay a loan?
A: The lender will first try to collect from the LLC’s assets or any collateral pledged. The business’s credit will be damaged by the default. If you personally guaranteed the loan (or if the loan is in your name), the lender can also pursue your personal assets and your personal credit could be hurt. Essentially, a default can close the business and still leave you personally responsible if extra guarantees were in place.

Q: What credit score is needed for an LLC business loan?
A: It varies by lender. Traditional banks often look for a personal credit score around 680 or higher for a small business loan approval. SBA loans may accept slightly lower scores (mid-600s) if other aspects are strong. Many online lenders will work with scores in the low 600s or even high 500s, but at the cost of higher interest rates. Building a good business credit profile can also help your LLC qualify on its own in the future.

By understanding these points, you now know that yes, an LLC can take out loans and how to navigate the process. Remember to borrow wisely, keep your personal and business finances appropriately separated, and choose the loan option that best fits your LLC’s needs. With the right approach, a loan can be a powerful tool to help your LLC grow and succeed while maintaining the legal protections and financial health of your business.