GettyImages; Illustration by Hunter Newton/Bankrate
Key takeaways
- Secured business loans require collateral to back the loan
- Unsecured business loans typically require a personal guarantee, while secured loans may have lower interest rates and higher borrowing limits
- Secured loans may be better for those with lower credit scores or seeking more competitive loan terms, while unsecured loans are better for those without assets
When deciding which type of small business loan is best for your business, you’ll want to consider secured and unsecured options. Secured loans require the borrower to provide something of value as collateral. This collateral may be business equipment, real estate, vehicles accounts receivable, inventory or another asset. If the borrower defaults, the lender can seize the collateral as repayment.
Unsecured business loans don’t require collateral but will likely require a personal guarantee. The personal guarantee allows the lender to pursue your assets in court if you fail to make payments. Typically, lenders require all business owners with a certain percentage stake or higher to provide a personal guarantee. Secured business loans can also require personal guarantees.
Let’s dive into the main differences between secured and unsecured loans and which one is right for your small business.
Secured or unsecured small business loan: What’s the difference?
Take a look at the key differences between secured business loans and unsecured business loans:
| Secured business loan | Unsecured small business loan |
|---|---|
| Collateral required | No collateral required |
| Lower interest rates | Higher interest rates |
| Available to borrowers with minimal credit history or low credit scores | May require a higher credit score |
| Lender can seize collateral if the borrower defaults on the loan | Lawsuit required to initiate collection of defaulted-on loans |
| Borrowing limits are typically higher because there is collateral to back the loan | May have lower borrowing limits because the loan isn’t backed by collateral |
| May require a personal guarantee | Usually requires a personal guarantee |
Bankrate insight
Lenders will need to appraise the value of your collateral to see that it can cover 80 percent to 100 percent of the loan in case of default. Examples of collateral include cash, real estate, inventory and vehicles.
Secured business loan pros and cons
Keep these advantages and disadvantages in mind before applying for a secured small business loan.
Pros
- Lower minimum interest rates than unsecured loans
- Lenders often allow higher borrowing limits
- It’s easier to qualify for a secured loan
Cons
- Borrower must have assets that can cover 80 percent to 100 percent of the loan
- Collateral must be appraised, a potentially time-consuming step
- Lender can seize your assets used as collateral if you fail to repay the loan
Unsecured business loan pros and cons
Unsecured business loans also have pros and cons worth considering. Examples of unsecured business loans include term loans, business lines of credit and merchant cash advances.
Pros
- Doesn’t require business collateral
- May offer faster funding since there is no appraisal process
Cons
- Can be more expensive
- May have strict eligibility requirements
- May have lower loan amounts
Secured or unsecured small business loan: Which is right for me?
Deciding on whether a secured or unsecured business loan is right for you often depends on your needs, whether you have collateral and what loan terms you’d like.
Many lenders offer lower interest rates and longer or more favorable repayment terms to low-risk buyers. If you don’t have a perfect credit score, offering collateral lowers the risk for the lender, which could get you a better rate.
Secured loans are a good fit if:
- You’re a startup business owner and don’t have the assets to secure the loan.
- You have bad credit and can’t qualify for an unsecured business loan.
- You want a high loan amount and the most favorable loan terms.
Unsecured loans may be better if:
- You lack assets or don’t want to risk losing your assets.
- You need cash quickly and don’t want to wait for assets to be appraised.
- You have strong credit and business financials, making it easier to get a lower interest rate without collateral.
If you can qualify for both secured and unsecured business loans, weigh the advantages and risks of each before determining what is best.
Bottom line
Both secured and unsecured small business loans can help business owners who need working capital or long-term financing. But choosing the right type depends on several important factors, including your credit score and available assets.
If you can’t qualify for either type of small business loan, there are alternatives to consider. These include personal loans and business credit cards. Both may be easier to qualify for, but a business credit card can help you build business credit, which can lead to better financing options in the future.
Frequently asked questions about secured and unsecured business loans
There are several types of SBA loans, and the requirements differ among loan types and lending partners. Some lenders may require collateral for a certain loan type, while others do not. For example, lenders are not required to take collateral on 7(a) loans of $50,000 or less. If the loan amount exceeds $500,000, the lender must secure collateral worth up to the loan’s value. Ultimately, you should speak with the lender about the SBA loan type you are considering to learn if they require collateral.
Both secured loans and unsecured loans have benefits. Secured loans are a better option if you have a lower credit score but still want a favorable interest rate. Unsecured loans are a good option if you don’t want to risk your assets and you are willing to take on higher interest rates for the loan. The better option is different for each business.
There are many small business lenders for secured and unsecured business loans, and the application process differs for each lender and loan type. However, some parts of the application process will be similar. You will likely need a business bank account, a business tax ID number, past financial statements for the business and a detailed plan for what you will do with the loan funds. If you are applying for a secured loan, you must also provide collateral and documents proving the collateral belongs to you or your business. Talk to your lender for the specifics of applying for a business loan.
