Types of LLC loans

Whether you’re looking to expand operations, manage cash flow, or invest in equipment or real estate, choosing the right LLC loan is crucial in moving your business forward when you don’t have the money to make your dreams a reality. LLCs claimed the lion’s share of 7(a) and 504 loans from the Small Business Administration (SBA) in fiscal year 2024, receiving over $12.5 billion in 7(a) and $3.3 billion in 504 loans.

SBA loans are just one of several LLC funding options to choose from. Understanding the different types of LLCs, who they’re best for, and how to get an LLC loan can help improve your chances of getting approved for financing.

Bank loan: Best for established businesses

Of the types of LLC loans, these are the most traditional. Bank loans come from established banks and credit unions. They’re generally reserved for business owners with good or excellent credit. Compared to alternative business lenders, banks tend to have strict requirements like a minimum of two years in business and annual revenue requirements of around $150,000.

Despite the stringent lending guidelines, traditional banks are often the best banks for small business loans that are worth considering as they often come with lower borrowing costs compared to other lenders. Most bank loans also allow you to repay the amount you borrow over an extended period, making the monthly payments more affordable. Or, you might be able to borrow a higher amount than you’d qualify for or be able to comfortably repay with shorter-term financing options.

Some banks require you to apply in person for a business loan, and it could take several days or weeks to receive a lending decision and funding. If you need money fast to jump on an opportunity before someone else, consider fast funding options instead.

Pros

• Competitive interest rates
• Extended repayment periods
• One-on-one customer service

Cons

• Not as accessible to borrowers with lower credit scores
• Slower application decisions and funding timelines

Term loan: Best for long-term investments

Like how different LLC types shape how your company operates, term loans have several varieties. Term loans offer you a lump sum of cash to use for business expenses and allow you to repay over a repayment term, anywhere from a few months to several years.

These loans are offered by traditional banks, credit unions and online lenders. Online lenders often feature rapid approvals and funding times, but term loans from banks and credit unions are generally slower to fund.

The business loan requirements are similar to other types of LLC loans. You can find LLC term loans with as little as six months in business, $100,000 in annual revenue and a personal credit score in the 600s. You’ll find the most lenient requirements will come from online lenders. Bank lenders often have stricter, such as requiring a higher annual revenue and credit score. The exact rate you receive will depend on your creditworthiness and the type of lender you choose.

Online term loans often come with higher interest rates and may have additional fees in exchange for speed and accessibility. They’re also an option for small business owners with bad credit, but usually at a higher cost.

Pros

• Accessible through several types of financial institutions
• Fixed repayment terms
• Many lenders have fully online application processes

Cons

• High revenue requirements with some lenders
• Steep borrowing costs for credit-challenged business owners

Business line of credit: Best for short-term expenses

A business line of credit is a form of revolving credit. It functions like a business credit card, and the credit limit resets as you repay what you spend. Some lenders also let you make interest-only payments during the draw period, making your monthly payments far more affordable than what you’d get with other types of business loans.

Lines of credit have some downsides. You can usually only access funds during the draw period, which can be inconvenient if you need to make purchases over an extended period. Some business lines of credit rates may be variable, so your monthly payment could fluctuate once the draw period ends and you begin making payments toward the principal. You may also have to pay additional costs like a draw fee to access the money and a maintenance fee to keep the line open.

Because the lender can customize the credit limit for your business, you’re more likely to get approved for this type of LLC loan than other types. Many line of credit lenders, including traditional banks, have more lenient eligibility criteria, making it easier to establish a relationship with the lender and secure future financing.

Pros

• Allows you to build a relationship with a lender
• Can help you build business credit if on-time payments are reported
• Improves business cash flow
• May be more accessible than term loans

Cons

• Can have a lot of fees that increase the overall cost
• May have higher interest rates than traditional term loans
• Not all lenders report to credit bureaus
• Sometimes have short repayment terms

SBA loan: Best for affordable loans

SBA loans are insured by the U.S. Small Business Administration. They feature competitive, fixed interest rates and extended repayment terms to make monthly loan payments more affordable. You can use the SBA Lender Match Tool to find an approved lender to take out an SBA loan.

Several different types of LLC loans fall under this umbrella. Specifically, SBA loans are available in four forms:

• 7(a) loans: Access up to $5 million in working capital through an unsecured or secured loan product.
• 504 loans: These loans are backed by equipment or commercial real estate and are intended to cover major purchases.
• Microloans: Capped at $50,000, microloans are designed to help foster expansion and growth in small businesses.
• Loans from Community Advantage lenders: These lenders offer 7(a) loans for the express purpose of helping underserved communities, such as businesses in low-income areas.
• SBA CAPLines: These are lines of credit offered by the SBA meant to help small businesses do everything from covering seasonal fluctuations to paying for construction.

For some business owners, the disadvantages of SBA loans can outweigh the benefits. These loan products come with an extensive application process. The funding times are also rather lengthy, and it could be several weeks or months before you hear back and get the funds you need for your business.

Pros

• Have favorable interest rates
• Government backed with additional support available
• Longer repayment terms
• Variety of loan types available

Cons

• Complicated application paperwork
• Limitations for how money can be used
• Long waiting periods
• May require collateral
• Only available after other financing has been exhausted

Equipment loans: Best for no collateral

If your company needs money specifically to buy a piece of business equipment — whether that’s a new copier for the office or a semi truck — you might want to skip the other types of LLC loans and head straight here.

Equipment loans are self-collateralizing, meaning the equipment you buy is collateral for the loan. Because the loan is backed with collateral, lenders are more likely to approve you and offer you lower interest rates than other types of LLC loans. And because online lenders offer this kind of loan, you might be able to apply and get your loan funded quickly.

Pros

• Could help you build business credit
• Flexible financing option
• Often has fast funding
• The equipment you purchase secures the loan, with no additional collateral required

Cons

• Could require a down payment
• Limited to financing equipment
• Loan could outlive the equipment

Invoice factoring: Best for startups and bad credit

Invoice factoring lets you trade unpaid invoices for cash. You’ll sell them to an invoice factoring company for up to 85 percent or 90 percent of their worth, and the factoring company will become the payee, collecting payment from your clients. Upon receipt of payment, the factoring company will send you the remaining amount you’re owed, minus the factoring fees.

The factoring company assesses the client’s creditworthiness to determine if you qualify for financing, rather than focusing on your business’s credit. This makes invoice factoring an ideal option if you’re looking for LLC loans with bad credit. It can also fill in the gap in business loans for new LLC companies while they wait to build their business history. But this option comes with factoring fees and other costs that can make this a risky form of lending.

Pros

• Available to business owners with fair or bad credit
• Pay the factoring company when invoices are paid
• Streamlined application process and fast funding times

Cons

• High factoring fees
• Most advances are capped at a percentage of the invoice value

Merchant cash advances: Best for seasonal cash shortages

A merchant cash advance (MCA) provides another option when it comes to business loans for new LLC companies. With an MCA, the lender issues you money right away and gets repaid either by drawing from a designated bank account or through your future credit or debit card sales.

Approval rates for MCAs are better than many other types of business loans. So, they tend to be a good option for businesses with bad credit. However, MCAs charge factor rates instead of interest rates, making them an expensive form of financing. The payment schedule is also aggressive, often requiring you to repay daily or weekly. You might use this form of financing for emergency needs or if you can’t qualify for other types of LLC loans and have substantial debit or credit card sales.

Pros

• Fast funding
• Lenient approval requirements
• No collateral needed

Cons

• High fees
• Only an option for companies that conduct a meaningful amount of business via credit or debit card sales

What small business loans for an LLC be used for

What you can use an LLC loan for may depend on the lender and type of loan. However, generally speaking, small business loans can be used for a wide variety of purposes, including:

• Replenishing inventory
• Buying equipment or upgrading technology
• Real estate purchases
• Business expansion or acquisitions
• Marketing costs
• Day-to-day expenses
• Startup costs

Where to get LLC loans

Now that you have a feel for the different types of LLC loans, you’re probably wondering where to get them. You can get LLC loans from:

• Banks and credit unions: These established institutions usually offer bank loans, term loans, lines of credit and equipment loans. Banks and credit unions typically have the best LLC loan rates. Many also offer SBA loans, so if you’re in the market for that type of financing, research your options.
• Online lenders: These are alternative lenders that let you apply and get funded online. They usually have looser eligibility requirements than banks and credit unions, but to make up for that added risk, they generally charge more interest and fees.
• Community Development Financial Institutions (CFDIs): These are credit unions and banks with a focus on providing financial products to historically marginalized communities. As a result, when you apply for a loan with a CFDI, they may look less at your credit history and more at your overall community impact.
• Minority Depository Institutions (MDIs): These are similar to CFDIs in that they aim to support traditionally underserved business owners. If a bank or credit union has this federal designation, it means they are either owned or directed by people from minority groups. By the numbers, they originate more SBA loans for minority business owners than non-MDIs.

The bottom line

Finding the best LLC loan comes down to your company’s funding needs, financial health and what the lender is offering. Consider which types of LLC loans will help you reach your funding goals, familiarize yourself with the lending guidelines and weigh the pros and cons to determine which is best for your business.

Traditional bank loans and term loans are the preferred choices if you have an established business in good financial health and your credit rating is solid. But if you’re just starting out or have faced financial challenges, you’ll likely have a better chance of getting approved for other types of LLC loans or alternative funding sources like business credit cards.

Frequently asked questions

• Does an LLC business loan affect your credit?

  When you apply for business financing, you may see a temporary drop in your personal or business credit score. But, as long as you make on-time payments and the lender reports to credit bureaus, you should see your score rebound (and potentially increase). If your business loan requires a personal guarantee, your personal credit score will drop if you end up defaulting on the loan.

• Can a new LLC get a loan?

  Most banks prefer companies that are up and running for at least two years, but there are online lenders that bring that requirement down to as little as three six or more months in business. That said, there are options for startups that don’t quite meet this threshold, but you can expect higher borrowing costs to offset the risk the lender assumes by doing business with you.

• How do I borrow money under my LLC?

  To borrow money, you’ll need to fill out an application and provide a list of required documents. This usually includes financial documents and a business plan. Most lenders also require a personal guarantee, which means you’ll be personally liable for the loan if your company falls behind on the payments and cannot repay what’s owed.