Lenders are generally reluctant to lend to entities, such as limited liability companies (“LLCs”) and corporations because it is more risky than lending to an individual. The primary reason is because the liability of the LLC or corporation is limited to the assets owned by the LLC or corporation. Thus, if the LLC or corporation becomes insolvent, the lender will have no assets to go after to recover the debt except for foreclosing on the property.
Lenders know that the members of LLCs and shareholders of corporations generally cannot become personally liable for the LLC or corporation’s debts. Whereas if a loan is with an individual, the lender could pursue the individual personally and obtain a judgment against the individual, making it more likely that the lender will be compensated.
Another issue lenders could face is ownership of the LLC or corporation changing. For instance, the owners of an LLC could sell the membership interest to other parties, effectively changing ownership of the property that is mortgaged. The new owners may not be as responsible as the prior owners that signed the mortgage on behalf of the LLC.
If a lender is willing to lend to an LLC or corporation, it is not uncommon for the lender to require you to sign a personal guaranty. Guaranteeing the loan is like co-signing for a loan. If the primary borrower, the LLC or corporation, is unable to pay the mortgage, then the lender can go after your assets for the debt. It is also not uncommon for a lender to increase the interest rate if the borrower is an LLC or corporation since the lender is taking on more risk.