How LLCs raise money

How Do LLCs Raise Funding?

An LLC is a business entity that offers liability protection for its owners. It’s different than a C corporation (C corp), although you can choose to have your LLC be taxed as a corporation. Raising capital or fundraising for an LLC is probably going to look different than for a corporation or startup. While corporations and startups typically turn to investors like venture capitalists or angel investors to raise funding, it will likely be difficult to get venture capital for an LLC. But there are many ways to secure LLC financing.

First, consider bootstrapping your LLC. This basically means starting a business on a small budget, using your personal assets. You’ll try to avoid any unnecessary expenses until you get going and the business can afford to grow. Also, you can consider crowdfunding and raise money with the help of friends, family, and even strangers. 

But neither of these options may be open to you to build your LLC or help with cash flow. For these businesses, we cover the best ways to raise money in the next section.

What Are 3 Ways a Company Can Raise Money?

There are several ways of funding LLCs that business owners use frequently. Here are some of the most common ways:

1. Apply for business funding

There are many types of small business loans that your business may qualify for, like lines of credit, term loans, and merchant cash advances. You’ll usually have to pay interest on what you borrow, but the increased cash flow could make all the difference in your business success. Plus, you may be able to secure a lower interest rate if you have good credit. Learn how to establish business credit to get started.

Also, consider business credit cards. Credit cards can be an invaluable tool for small businesses that need flexible funding. It’s typically easier to qualify for a credit card than a business loan as well.

See the funding options you’re most likely to qualify for — before applying — by securely adding your business details to your profile with Nav.  

2. Bring on a new LLC member

An LLC can have multiple owners (called members). Bringing on a new owner and forming a partnership can increase your access to capital through what is called capital accounts. The new member should contribute seed money to your LLC. Plus, they may have network connections to willing investors. 

Be sure to update your operating agreement accordingly and document your capital accounts thoroughly (and don’t be afraid to bring in professionals for tax or legal advice). 

3. Look for a grant

Small business grants offer money that you don’t need to pay back. Grants can be difficult to get since the competition is often high, but they also offer a great way to increase your cash flow. Be sure to read the requirements before applying — you might be surprised how far simply following the instructions can take you. Many grants also target specific small business owners, like women or veterans. 

How Much Cash Should I Keep in My LLC?

The amount of cash you need in your LLC’s bank account depends completely on what type of business you run. A small freelancing business will probably need much less cash on hand than an LLC that manufactures goods. Make sure that you have enough cash in your account to cover upcoming expenses and bills, plus some wiggle room, as well as funding for any new projects or growth you’re planning. Keep in mind that some of this cash can come from small business funding.

How Do Investors Get Paid in an LLC?

If you’re a member of an LLC, you can’t take out a salary. Instead, you’ll need to take out a share of the profits. For a single-member LLC, you’ll take out an “owner’s draw,” which is a transfer via check or transfer from the business bank account to the member’s personal account. 

For a multi-member LLC, you’ll use capital accounts to pool all the owners’ investments. The details should be included in the LLC operating agreement. Members can draw from this pool of money as needed and as applicable, which should be recorded by the business’s accounting team.

What Are the Qualifications an LLC Needs To Be Approved for a Loan?

Lenders usually look at the following when they’re assessing whether or not you qualify for a loan:

• Your credit score (personal and business)
• Your annual revenue
• Your time in business

Other factors that may come into play are your business plan, your business financials, and how much collateral you can put down. If you’re applying for a loan from the Small Business Administration (SBA), there are notoriously strict requirements to qualify. Keep in mind that having higher business and personal credit may help you secure lower interest rates.

FAQs

• How can I raise $10,000 for my LLC fast?
  One of the best ways of getting $10,000 quickly for an LLC is to turn to fast business loans. Fast business loans have easier requirements than more traditional funding and can give you the money you need within a few days. Just keep in mind that these loans tend to come with higher interest rates, so it’s best to use these if other funding options fall through.
• Should I pay myself a salary from my LLC?
  Small business owners and entrepreneurs of LLCs shouldn’t take an annual salary. Instead, you’ll get paid from the LLC’s profits, which means you may not make money right away. You’ll pay taxes on what you make on your personal income tax return. 
• What happens if my LLC doesn’t make money?
  It’s common for a new business to not make a profit in the first year or so of its life. This is called “taking a loss,” and isn’t always a problem. When you file your taxes, you can deduct any net operating loss to lower your taxable income. Just be careful to not take a loss for more than two or three years or the IRS may decide to classify your business as a hobby, which means you could no longer deduct business expenses.
• How do LLCs divide profits?
  LLC profits are typically distributed at the end of the year to each of the owners. Any LLC income is sent to the capital accounts of the owners based on the proportion of the LLC they own. This proportion is usually determined by the amount of their initial investment in the business and is outlined in the operating agreement. Technically speaking, the profits usually sit in one pool of money and accounting does that math to figure out how much of each of the total profits goes to each owner.