Almost all businesses have a time when cash flow isn’t what you anticipated because your account receivables are a little slow or expenses are higher than planned for at that period of time. You could also start planning on expanding your business and need new equipment or need to develop an advertising campaign for a new product or service. As with most new  businesses and existing ones, the issue of where to get the funds takes center stage.

At first thought, the easiest answer would be for the LLC members to make additional capital contributions for  the needed funds. Of course, as with most businesses, the members have already contributed significant amounts or  simply don’t have the funds to contribute. This is the point where the LLC has to explore the option of borrowing money. We are briefly going to discuss some of the options and stress that this is not a complete guide but just some things to think about when borrowing money for your LLC.

The first thing to be considered is where you wish to borrow the money from. You can choose from banks, credit unions, savings and loans, private individuals or even from members themselves. Of particular importance is the use of resolutions when borrowing money. Many banks require a resolution by the LLC when they are lending money to an LLC. When borrowing money it is important to have all LLC members involved as the funds borrowed are the responsibility of the LLC and thus directly affect the LLC members. Affect them, not particularly in regards to personal liability, although some lending institutions can require a personal guarantee from members, but can create such a liability for the business that failure is inevitable.

The resolution that is drafted can impose limitations such as, the maximum amount that will be borrowed, interest rates and terms of payment or how the loan is secured. If the LLC is applying for a line of credit it is important that the resolution places a limit on the amount used without approval from all LLC members. Limits could include the  amount that could be used per transaction, a particular period or the number of transactions. In regards to loans from LLC members, resolutions are unequivocally necessary. Along with the resolution, a promissory note outlining the terms of the loans.

Loans or lines of credits from a bank are not considered income to the LLC. Any interest or finance charges paid by the LLC is a deductible expense. With loans from LLC members it is important that the terms of the loan include a rate of interest and the length of the loan. The loan must be reasonable as well. If not the IRS could rule the loan as additional capital contributions. Do your research and if need be, consult a qualified professional.