Due to the structure of a limited liability company, banks hesitate to lend funds to a new business unless the members are considered creditworthy and borrow on their own financial records. In addition, venture capitalists avoid investing in an LLC for the same reason -- the business structure. Thus, options in initial funding depend a great deal on the financial situation of the owners.
State laws governing LLCs vary. However, an LLC is a business entity that shares structure characteristics with both a sole proprietorship and a corporation. The owners after starting the company are called "members." In legal matters, the business is separate from the members. Conversely, in tax matters, business income passes to the members, who bear the tax liabilities of the company's income.
Whether the business has one owner or 10, initial funding from members is generally how an LLC begins. Thus, entrepreneurs starting an LLC should look at the combined personal funds the members can contribute to the company, looking first at the personal savings each member could reasonably give up. However, the funding does not have to be cash. Property or services also qualify as capital contributions to an LLC.
Personal Loans and Member Contributions
Looking at the creditworthiness of the owners/members of an LLC and funding through personal loans is another option. In this case, each member is personally liable to the lender for repayment. A member can contribute needed property to the LLC. For example, suppose one member has office space the new company can use. A second member may have a vehicle to contribute. The property's value is assessed and then treated as a monetary contribution when figuring the percentage of ownership for which the member is entitled from funding the LLC with property.
Using an Established Business Record
Because a financial institution cannot access assets of the members when the loan contract is signed with the LLC, the company will need to own collateral to back the loan or have a well-established credit record. In situations where the company has been conducting business under a different structure such as a sole proprietorship and changes to an LLC structure, prior credit history of the business can be used to secure a bank loan. Furthermore, property contributed to the LLC may be used as collateral.
Some LLCs are eligible to apply for assistance from the U.S. Small Business Administration for financial help. The agency requires the applicant to present the company's business plan and supporting documentation that show other sources of funding, especially personal assets that were used for funding first. Approved applications receive SBA backing on loans. Members can check with the agency to see if their LLC qualifies.