Is a Small-Business Loan Secured or Unsecured?
Whether a small-business loan is secured or unsecured depends on the lender and the type of financing offered.
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Managing Editor A small-business loan can be secured or unsecured — depending on the loan type and individual lender you’re working with. Secured business loans are backed by physical collateral. Unsecured business loans, on the other hand, do not require collateral.
Some lenders offer secured and unsecured loans, whereas others may only provide one option.
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What’s the difference between secured and unsecured business loans?
Secured business loans are backed by specific collateral
A small-business loan is secured when backed by specific collateral, typically business assets, such as equipment, inventory or real estate. Your lender may also require a personal guarantee or uniform commercial code lien — in addition to specific collateral.
The collateral that you put up serves as security for the lender that you’ll repay the money you’ve borrowed. If you default on the loan, the lender can seize your collateral and sell it to cover its losses. As a result, some lenders prefer secured business loans because requiring collateral helps offset the risk they face when lending to small businesses.
Secured business loans are available from banks, credit unions and online lenders. These lenders may offer many different types of secured loans, such as SBA loans, term loans and business lines of credit.
Unsecured business loans don’t require specific collateral
An unsecured business loan isn’t backed by specific collateral, like property, equipment or inventory. However, most unsecured loans are backed by a personal guarantee or a UCC lien, even if physical collateral isn’t required.
A personal guarantee holds you individually responsible for the debt if your business can’t pay. In addition, it gives the lender the right to seize your personal assets to recover its losses in the case of default.
A UCC lien allows the lender to seize your business assets if you can’t repay your loan. UCC liens are official statements typically filed with the secretary of state in your business’s home state after signing your business loan agreement. Depending on the terms of your agreement, your lender may file a lien on specific business assets — or it may file a blanket lien — which gives the lender the ability to seize all business assets to recoup losses in the case of default.
Because these loans don’t require you to have physical collateral — or, if you do have it, don’t require you to put it up to qualify for financing — they can be faster to fund than secured business loans. However, interest rates are typically higher.
Unsecured business loans are available from both traditional and online lenders. Traditional lenders will generally require strong credit and multiple years in business to qualify.
Secured vs. unsecured business loans
The main difference between a secured business loan and an unsecured business loan is the use of collateral. This collateral offers lenders an additional guarantee that helps mitigate their risk when issuing small-business loans.
As a result, you’ll often see the following differences between these two types of loans:
| Secured business loans | Unsecured business loans | |
|---|---|---|
| Loan amount | Larger borrowing amounts. | Smaller borrowing amounts. |
| Loan terms | Longer repayment period. | Shorter repayment period. |
| Interest rates | Lower interest rates. | Higher interest rates. |
| Funding speed | Slower to fund. May require an appraisal of the assets used for collateral. | Faster to fund. |
| Qualification requirements | Can be easier to qualify for. Lenders may prioritize the value of your collateral, even if you’re a newer business or don’t have perfect credit. | Can be harder to qualify for. Without the security of collateral, lenders may focus more closely on credit score and business history. |
Choosing a secured or unsecured business loan
The right small-business loan will depend on your unique financing needs and how well you meet lenders' business loan requirements. Here are some instances, however, where you might consider a secured business loan:
- You want better loan terms. Putting up collateral (provided that you’re willing to do so and have it) can help you access larger loan amounts, lower interest rates and longer repayment terms — especially if you have strong credit and solid business finances.
- You’re a new business or don’t have great credit. If you’re a new business or don’t have perfect credit, offering up collateral can make it easier to qualify for some types of small-business loans. However, it may still be challenging to qualify for a secured loan from a bank or credit union, as these lenders typically require excellent credit and multiple years in business.
On the other hand, here are some instances where you might consider an unsecured business loan:
- You don’t have collateral or don’t want to put your business assets on the line. If you don’t have adequate collateral or don’t want to put your business assets at risk, an unsecured loan may be a better option. However, keep in mind that most lenders will require a personal guarantee or UCC lien, so you’ll need to put up some form of security, even if it isn’t physical collateral.
- You need fast access to short-term financing. If you need to cover immediate or emergency expenses, an unsecured loan — or unsecured line of credit — may offer quicker access to capital. In exchange for speed and shorter repayment terms, however, unsecured loans typically have smaller loan amounts and higher interest rates compared to secured loans. Without collateral, lenders will also rely more heavily on your credit score and business history to evaluate your loan application.
Frequently Asked Questions
Is an SBA loan secured or unsecured?
Most SBA loans are secured. SBA 7(a) loans, for example, typically require physical collateral on loan amounts greater than $50,000. All SBA loans will require a personal guarantee.
Is it better to have a secured or unsecured loan?
If you can qualify, secured loans can be better for accessing competitive interest rates and terms. Unsecured loans, however, may be better if you don’t want to risk your assets.
What is an example of a secured and unsecured business loan?
Examples of secured business loans include SBA loans, equipment financing and commercial real estate loans. Examples of unsecured business loans include some business lines of credit, business credit cards and merchant cash advances.
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