Alternatives to LLC loans

Forming a limited liability company (LLC) is a popular move among business owners, mainly for the legal and tax benefits that these business entities provide. But finding financing for your LLC can be challenging.

A term loan from a bank or credit union typically offers rates and repayment terms that are more favorable. But these are hard to qualify for if you are a business owner with bad credit. Plus, they can be slow to provide funds.

If your LLC needs financing, and a traditional loan from a bank or credit union isn’t the best fit, here are several types of alternative loans to consider.

Business lines of credit

A business line of credit is a popular alternative to an LLC loan. Like a credit card, a business line of credit allows you to take out money as you need, up to the limit set by your lender. Then, you’ll pay back the funds you borrowed with interest every month. Your lender determines credit limits and interest rates and will depend on a few factors, including your company’s history and annual revenue.

Pros

• More flexible and fewer requirements than many business loans
• Only pay interest on the amount borrowed
• Good option if you don’t have a specific purpose for the funds

Cons

• Rates tend to be higher than term loans from traditional lenders
• May have fees, including an origination fee, maintenance fees, draw fees and renewal fees
• May come with a limited amount of allowable draws or need to be renewed annually

Microloans

Microloans are smaller loans offered by alternative lenders like peer-to-peer and non-profit lenders. They’re also available from the Small Business Administration. Interest rates and repayment terms vary by lender. Loan amounts tend to be much smaller than term loans and are usually capped at $50,000, making them ideal for startups and small businesses that need a little bit of money to launch or expand.

Pros

• Many microloans are available for businesses with limited or bad credit
• Interest rates are often low for well-qualified borrowers
• Some microlenders offer free or affordable business training and coaching

Cons

• Smaller borrowing limits than other loans
• Borrowers with poor credit may get hit with higher interest rates
• Some microloans can only be used for specific purposes

Business grants

Some alternatives to LLC loans can save you money. Business grants are a highly coveted source of funding that doesn’t need to be paid back. It’s often designed to help people from underrepresented groups launch and grow their businesses. This includes veterans and minority business owners. The downside is that they’re harder to qualify for than loans and other borrowing-based types of funding.

Pros

• Don’t need to repay the funds or take on debt
• Can offer a leg up for underrepresented groups like women, veterans and minority business owners
• Being a grant recipient reflects well on your business and may help you get more grants or visibility

Cons

• Highly competitive and lengthy application processes
• Narrow eligibility criteria
• Grant amounts are typically less than loans

Special purpose credit programs

People from underserved communities may also qualify for special purpose credit programs (SPCPs). With authorization from the Equal Opportunity Credit Act (ECOA), SPCPs allow lenders to create specific programs that make loan qualification easier for borrowers from historically disadvantaged groups.

Pros

• Increases access to capital for economically or socially disadvantaged business owners
• Some lenders, including JPMorgan Chase, offer SPCPs in tandem with business coaching
• Promotes diversity and equality in the small business sector

Cons

• Programs vary by lender and can be difficult to find
• Not everyone will qualify
• Funding isn’t guaranteed

CDFI loans

Community Development Financial Institutions (CDFIs) are organizations like loan funds, banks and credit unions. They help historically underserved communities access business funding and other financial resources. More than 1,300 CDFIs are operating across the country, all of which must be certified by the U.S. Department of Treasury.

Pros

• Provides financing and tools to help low-income, minority and rural business owners grow their companies
• Business consulting is also available from some CDFIs
• CDFIs operate in all 50 states, Washington, D.C. and U.S. territories

Cons

• Not all businesses are eligible
• Application and funding timelines can be lengthier than other financing types
• Lenders create their own requirements, which may include minimum credit scores and rules against lending to felons or companies in certain sectors (such as alcohol or gaming)

Peer-to-peer (P2P) lending

Peer-to-peer lending lets businesses borrow directly from investors, which can be either individuals or companies. Loans are typically processed through online lending platforms, and loan amounts, repayment terms and rates can be similar to what you’d get with banks and other traditional lenders.

Pros

• Easy to apply online
• Some P2P lenders accept borrowers with credit scores as low as 600
• After approval, funds can be deposited in as little as one business day

Cons

• Interest rates can be higher than traditional loans, depending on your credit score and the P2P marketplace
• Origination fee can be as much as 8 percent of the loan amount
• P2P lenders might have red flags to watch out for, including high rates and inflexible terms

Crowdfunding

Crowdfunding is an LLC loan alternative that allows you to source funding from individuals interested in seeing your business succeed — often in exchange for a reward (like company merchandise) or equity. Kickstarter and SeedInvest are two popular crowdfunding platforms that let you set a fundraising goal, collect donations and interact with supporters.

Pros

• Some crowdfunding contributions don’t need to be paid back
• Don’t need to go through the typical loan application process
• Money comes from many investors (some of whom may become your customers) rather than a single lender

Cons

• Crowdfunding platforms may not let you access the money until you’ve raised your target amount
• Fees can add up quickly
• You may need to offer rewards or equity in exchange for donations

Invoice financing and factoring

If you have a rocky credit history and struggle to find an LLC loan, invoice financing or factoring might be worth considering. These funding options allow you to use your unpaid customer invoices to get cash quickly. The downside is that this form of financing can be more expensive than traditional loans and lines of credit.

With invoice financing, you can borrow against the money owed to you and then repay the lender once your customers settle their invoices. Your loan amount is usually limited to about 85 percent of the invoice totals.

On the other hand, invoice factoring involves selling your outstanding invoices to a lender, who then gives you a cash advance on the funds. The invoice factoring firm will then assume responsibility for collecting the money from your customers.

Pros

• Available to people with average or poor credit
• Helps you get money quickly
• The application process isn’t as involved as other loan types

Cons

• Fees and rates can cut into your profits
• Loan amounts are limited to a percentage of what your customers owe
• If your clients don’t pay, you may need to repay the factoring company

Merchant cash advances

With a merchant cash advance (MCA), you’ll receive a lump sum for your business in exchange for a percentage of your future credit card sales. Like invoice financing and factoring, MCAs are best for short-term use because they often come with high fees and tight repayment windows. Plus, MCAs aren’t subject to usury laws, which limits how much interest you can be charged. So, it’s not uncommon for interest rates for some MCAs to soar into the triple digits.

Pros

• Offers quick access to cash
• Open to business owners with bad credit
• Easier to qualify for than many other kinds of funding

Cons

• Interest rates can be extremely high
• Not an ideal long-term financing solution
• Requires you to give up a portion of future sales

Business credit cards

Like a personal credit card, you can charge corporate expenses to a business credit card. Ideally, you would pay off the entire balance at the end of each billing cycle. But business credit cards let you carry a balance from month to month if necessary, though you will then start to accrue interest.

Pros

• Settling your balance in full means that you won’t pay interest
• You can use money as you need it
• Some business credit cards have extended interest-free periods

Cons

• Interest rates and annual fees can be steep
• Business credit cards aren’t required to comply with the Credit CARD Act of 2009, so they might not offer the same protections as personal credit cards
• You’ll need a good-to-excellent credit score to qualify for the best business credit cards

Bottom line

If you can’t access traditional business loans for an LLC, there are several other financing options to consider — even if you have bad credit or you’re just getting your business started. Just make sure to weigh the pros and cons when comparing LLC loans and understand exactly what you’ll need to offer your lender in exchange for financing.

Frequently asked questions about alternatives to LLC loans

• How can I fund a business without a loan?

  Crowdfunding, grants and business credit cards are three examples of how to fund a company without an LLC business loan or LLC startup loan. You can also consider microloans or peer-to-peer lending if you don’t want to use LLC bank loans.

• What is alternative business lending?

  Many small business owners have previously sought funding from banks, credit unions and other traditional lenders. But there are now alternative lenders, such as crowdfunding platforms and online lenders. They can make qualifying for a loan easier and receive funds quickly.

• What is an example of alternative financing?

  Peer-to-peer loans are a form of alternative financing where a business owner borrows money from an individual or group who wants to invest in the company. Eventually, these investors are repaid with interest. These loans are typically managed through online platforms like Kiva.