A small-business loan can be secured or unsecured, depending on the loan type and the lender. Secured business loans require physical collateral, like equipment or inventory. Unsecured business loans do not.
Some lenders offer both types, while others offer only one.
But just because a business loan is “unsecured” doesn’t mean it’s risk-free. Most require a personal guarantee, a uniform commercial code (UCC) lien on your business assets or both. This means that your personal and business assets can still be at risk if you default.
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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 it’s backed by specific collateral, like equipment, inventory or real estate. Your lender may also require a personal guarantee or a UCC lien — in addition to collateral.
The collateral 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.
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 doesn’t require specific collateral, like property, equipment or inventory. However, most require a personal guarantee or a UCC lien.
A personal guarantee holds you individually responsible to pay back the loan if your business can’t. This means a lender can take your personal assets to recover its losses if you default.
A UCC lien lets the lender 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. This gives the lender the ability to take all business assets to recoup losses if you default.
Because these loans don’t require physical collateral, they can be faster to fund than secured business loans. However, interest rates are usually higher.
You can find unsecured business loans from both traditional and online lenders. Banks and credit unions usually 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. Collateral reduces lenders’ risk, making it potentially easier to qualify.
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. |
How to choose between a secured or unsecured business loan
The right small-business loan depends on your financing needs and what you can realistically qualify for.
Here are some general guidelines to help you decide which might be the better fit.
Consider a secured business loan if…
- You want better loan terms. Offering collateral can help you access larger loan amounts. It can also unlock 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 collateral can make it easier to qualify for some types of small-business loans. However, it may still be hard to qualify for a secured loan from a bank or credit union. These lenders typically require excellent credit and multiple years in business.
» MORE: Compare the best secured business lines of credit
Consider an unsecured business loan if…
- You don’t have collateral or don’t want to put your business assets on the line. If you don’t have enough 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 anyway.
- You need funds quickly. If you need to pay for immediate or emergency expenses, an unsecured loan — or unsecured line of credit — may offer quicker access to capital.
- You can handle higher payments. Unsecured business loans often have shorter repayment terms and higher interest rates than secured loans. This can mean larger payments for the same loan amount.
- You have a strong credit score and long business history. Without collateral, lenders will focus more on your credit score and business history when deciding whether or not to give you a loan.
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 loans over $50,000. All SBA loans require a personal guarantee from anyone who owns 20% or more of the business.
» MORE: Do SBA loans require collateral?
Is it better to have a secured or unsecured loan?
It depends. If you want better rates and terms, secured loans are often the better choice. But if you don’t have collateral or need cash fast, an unsecured loan may be the way to go.
What is an example of a secured and unsecured business loan?
SBA loans, equipment financing and commercial real estate loans are examples of secured loans. Some business lines of credit, business credit cards and merchant cash advances are examples of unsecured loans.
