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 considering your business loan options, you’ll want to think about whether you get a secured loan or an unsecured loan. Secured loans require the borrower to provide something of value as collateral, like 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 personal assets, like your house, in court if you fail to make payments. Here are the key details to consider when deciding between a secured and an unsecured business loan.
Secured or unsecured small business loan: What’s the difference?
While secured and unsecured business loans can have similar terms and functions, there are a few key differences to consider:
| Secured business loan | Unsecured small business loan |
|---|---|
| Collateral required | No collateral required |
| Lower interest rates | Higher interest rates |
| Available to borrowers with less 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 |
| May come with lower revenue requirements | May come with higher revenue requirements |
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. Some business loans will be secured by their type, such as equipment loans, which use the equipment you purchase using the loan as collateral.
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 have business assets to secure the loan.
- You have bad credit and can’t qualify for an unsecured business loan.
- You want a higher loan amount and more favorable loan terms.
Unsecured loans may be better if:
- You have a startup business that lacks assets and are comfortable pledging personal assets as collateral.
- 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
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