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Secured vs Unsecured Business Loans: Key Differences

What is a Secured Business Loan?

A secured business loan requires collateral to secure the loan. Collateral is an asset that the borrower pledges to the lender in case of default. Common types of business collateral include:

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  • Real estate – This could be the land and building your business occupies or other commercial or residential property you own.
  • Equipment – Machinery, vehicles, or other equipment your business uses can often be used as collateral.
  • Accounts receivable – If your business has outstanding invoices from customers, these can sometimes be used as collateral.
  • Cash savings – CDs, money market accounts, and sometimes even checking or savings accounts can be pledged.

If the borrower stops making payments on a secured business loan, the lender can seize the collateral, sell it, and use it to recover their losses.

Secured small business loans usually have lower interest rates because the collateral reduces the lender’s risk. However, the collateral requirements mean that only established businesses with valuable assets to pledge may qualify. Startups and newer companies usually need to look at other financing options.

What is an Unsecured Business Loan?

An unsecured business loan does not require the borrower to put up any collateral. These loans are riskier for lenders because there are no assets backing the loan in case of nonpayment. As a result, unsecured business loan interest rates are typically higher.

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Since there is no collateral requirement, unsecured business loans are more accessible to newer businesses and startups that don’t have real estate, equipment, or other assets to pledge. Approval decisions are based more heavily on the borrower’s creditworthiness and financial track record. Revenue, time in business, and personal credit scores are key factors.

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Unsecured loans also tend to have shorter repayment terms of 1-5 years compared to longer terms of 10+ years for many secured small business loans.

Key Differences Between Secured and Unsecured Business Loans

Collateral

  • Secured loans require pledged assets to secure the loan. Unsecured loans do not.

Interest rates

  • Secured loan rates are lower, often between 3-7%. Unsecured loans have higher rates of 10% or more.

Qualification

  • Secured loans require valuable business assets to pledge as collateral. Unsecured loans have fewer barriers to qualification.

Loan amounts

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  • Secured loans provide larger loan amounts given the pledged collateral. Unsecured loans tend to have lower maximums.

Repayment terms

  • Secured loans can have repayment terms of 10+ years. Unsecured loans generally max out at 5 years.

Costs

  • Secured loans can have lower overall costs given the lower interest rates. Unsecured loans charge higher rates which increases total repayment costs.

When Should You Consider a Secured Business Loan?

Secured loans make the most sense if you:

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  • Have been in business for several years
  • Have valuable business assets like commercial real estate to use as collateral
  • Need a larger loan amount
  • Want to lock in a low fixed interest rate
  • Are comfortable putting your assets at risk
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For established businesses looking to finance major investments like new locations, expansions, or large equipment purchases, the lower rates and more flexible terms of secured financing are often beneficial.

When Might an Unsecured Business Loan be Better?

Consider an unsecured small business loan if you:

  • Are a newer startup without assets to pledge
  • Need a smaller loan amount
  • Want a faster funding time
  • Qualify based on good revenue, time in business, and personal credit
  • Don’t want to put your assets at risk with collateral

Unsecured loans provide more accessible financing for younger companies and smaller projects. Things like working capital, inventory, marketing efforts, or smaller equipment purchases can potentially be financed this way.

Where Can You Get Secured and Unsecured Small Business Loans?

There are many potential sources to consider when seeking secured or unsecured financing:

  • Banks – Most large banks provide both secured and unsecured business loan options. Community banks specialize in lending to local small businesses.
  • Credit Unions – Like community banks, credit unions cater to local customers and may offer competitive loan products.
  • Online Lenders – Online lenders like Kabbage, OnDeck, and Lendio offer quick unsecured loan decisions and funding.
  • SBA Loans – The SBA 7(a) loan program provides government-backed loans with attractive terms to qualifying businesses.
  • Alternative Lenders – Also known as merchant cash advance companies, these lenders provide financing by purchasing a share of future credit card sales or accounts receivable.

Be sure to compare multiple lenders to find the best rates and terms for your specific situation. Connecting with an experienced small business finance advisor can also help you navigate your options.

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Key Takeaways on Secured vs Unsecured Business Loans

  • Secured loans require collateral like real estate or equipment to secure the loan. Unsecured loans do not require collateral.
  • Secured loans have lower interest rates but can put your assets at risk if you default. Unsecured loans have higher rates but involve less risk.
  • Established businesses with valuable assets to pledge as collateral often qualify for larger, lower-cost secured loans.
  • Unsecured loans provide more accessible financing for startups and newer businesses that banks would not otherwise lend to.
  • Compare options from banks, credit unions, online lenders, SBA lenders, and alternative financiers to find the best loan for your needs.

Determining if a secured or unsecured loan makes more sense depends on your specific situation, financial qualifications, how much you need to borrow, and what risks you are comfortable with. Understanding the key differences allows you to make an informed financing decision for your small business.

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