Most Popular Financing Options For Limited Liability Company (LLC)
The U.S.-specific form of a private limited company, a Limited Liability Company (LLC) is, technically, a hybrid legal entity, that has specific characteristics of a corporation as well as a partnership or proprietorship. The trait that an LLC shares with a corporation are limited liability and the ones it shares with a partnership or sole proprietorship is the possibility of ‘revenue flow-through, i.e., the cash inflow of an LLC can be considered as the income of the owner. Known to be most suitable for companies with single owners, LLCs are usually considered more flexible than corporations. These can be owned by individuals, corporations, foreign entities, and even other LLCs, but not banks and insurance companies. LLCs require comparatively less paperwork and enjoy more flexible tax options than other business structures and access to certain tax write-offs. As an LLC is permitted under state status, the regulations governing them vary with state.
Further elaboration of the concept of Limited Liability discloses that it is a type of legal structure for an organization, where a corporate loss will not outstrip the company’s invested amount. Hence, in the case of LLCs, the private assets of the owners are never at risk if the company fails. Only the assets like real estate, equipment and machinery, and investments, which are made in the name of the company and the produced unsold goods can be seized or liquidated, when the company owes financer/s money. However, like any other type of corporation, an LLC requires an uninterrupted cash flow to not only pay for various operational expenses like hiring staff, renovating the workspace, surviving slow business seasons, carrying out marketing campaigns, branding or re-branding the business, repairing equipment etc., but also scale the business. Every business goes through highs and lows. To thrive in the low business seasons or pay for emergencies like a sudden breakdown of equipment etc., Limited Liability Companies often feel the need for business loans. Today, there are multiple financing options available for LLCs. Hence, a business loan seeker must follow a few steps to get access to the option that will best meet its business’s unique requirements.
The right way of getting an LLC business loan:
Firstly, a loan-seeker must understand its business’s primary requirements to be able to decide which financing option will suit its business the most. One needs to also consider the amount of debt he/she can afford.
Secondly, a loan-seeker should evaluate its eligibility by examining its credit score, time in business and annual revenue.
Thirdly, one must conduct thorough research to find a reputed lender that offers flexible repayment terms.
After choosing a lender, all the necessary application documents need to be gathered. The list of required documents comprises bank statements, financial statements, business property lease agreement, driving license of the applicant etc.
Finally, the application needs to be submitted online/offline, depending on the type of loan. Post that, the application gets reviewed and analyzed by the underwriters. Once the application gets approved, the applicant receives a loan agreement to sign.
2 Primary benefits of acquiring an LLC business loan:
The loan interest an LLC pays is tax deductible. This enables an LLC to save up a lot of money that would have gone into paying tax bills in the case of a corporation, at the end of the fiscal year.
Unless an LLC owner has signed a personal loan guarantee agreement, he/she will not be held personally responsible for the defaults on the loan repayments and hence, his/her personal assets won’t be seized to recover the amount. However, the business assets, that are put up as collateral, can get impounded.
Best Business Financing Options For LLCs:
Traditional Financing Options
Though traditional lenders like banks and credit unions offer business loans with appreciable repayment terms and the lowest interest rates, they have quite stringent requirements in terms of credit scores and trade history. Besides, banks have tedious application processes and often ask for a wide array of documents. Hence, bank loans are ideal for LLCs which have long trade histories and do not require urgent money to cope with emergencies.
This type of traditional business financing allows the borrowers to repay the lender over a specified period, which usually ranges between 6 months to 10 years, depending primarily on the borrowing LLC’s income stability, structure and credit score. In some cases, where the borrowers are looking for higher loan amounts with lower interest rates, the lenders require them to put up their business assets as collateral.
Alternative Financing Options
Merchant Cash Advance(MCA)
MCAs are one of the best options for those looking for quick funds. MCA providers offer the borrowers a lump sum, usually within 24 to 72 hours of application, in return for a percentage of the business’s future credit/debit card sales. The payable amount often gets automatically withdrawn from the daily credit/debit card transactions till the entire amount is recovered. Hence, those who tend to forget the repayment dates find MCAs beneficial due to the automatic repayment process. Also, the repayment amount changes with the business’s financial condition. The repayment amount is more in the peak business season, when the business is experiencing high cash inflow, than the slow seasons.
Business Line of Credits(LOCs)
Another convenient and flexible alternative financing option, Business LOCs offer the borrowers access to funds that can be used whenever needed. Business LOC providers do not compel the borrower to withdraw the entire approved amount at a go. The borrower gets the freedom to withdraw only the amount he/she requires at the moment and save up the rest for future needs. In the case of Business LOC, interest is added only to the withdrawn amount. As it is a revolving credit, one can repay the used amount and again withdraw the same amount in the future.
This allows the borrower to use the unpaid invoices as collateral in exchange for funds. In the case of invoice financing, lenders offer the borrowers 80% to 95% of the total value of your invoice. The borrowers get the remaining 5% to 20% of the invoice value (minus service charges and transaction fees) after their customers have paid. Invoice financing turns out to be extremely beneficial for business owners looking to free up the cash tied to their outstanding invoices.