Secured vs. unsecured business line of credit

According to the 2024 Small Business Credit Survey, 40 percent of small businesses applied for a business line of credit, making it the most commonly sought form of financing.

Understanding the key differences between a secured vs. unsecured line of credit is important when choosing the right funding type. If you have collateral, or business assets, such as real estate, equipment or cash reserves, you may qualify for a secured business line of credit with a lower interest rate or higher borrowing limit. An unsecured line of credit is what lenders offer if you don’t have collateral. Both options can be revolving or non-revolving, depending on whether the credit line replenishes as you repay.

Compare secured vs. unsecured lines of credit

Secured business lines of credit

If you choose a secured business line of credit, you agree to offer up assets to repay the loan if you default. Common types of business collateral include vehicles, real estate, inventory, or equipment. Your collateral’s total value should match the borrowed amount so the lender can fully recoup the funds.

Typically, with a secured business line of credit and other secured business loans, you’ll receive lower interest rates and higher borrowing limits since your lender assumes minimal risk.

Pros

• Lower interest rate: Loan approval isn’t based solely on your credit score or income. Your assets’ value matters too. Lenders may feel more comfortable charging lower interest rates.
• Higher loan amount: Depending on your assets’ value, you can access a higher loan amount than you would with an unsecured business loan.
• Increases odds of approval: Since the loan is secured with collateral equal to the loan’s value, lenders are more likely to approve borrowers with poor or fair credit.

Cons

• Loss of collateral: If the borrowed funds are not repaid, the lender can seize the assets, which may harm the business if the asset is vital to its operation.
• Lengthy application process: Lenders have to get the collateral appraised to ensure it is of value, and this can slow down the process of securing the loan.
• Risk of overspending: A high credit limit can tempt you to spend more than you can afford, leaving you struggling to repay what you’ve borrowed.

Unsecured business lines of credit

The biggest difference between a secured and unsecured business line of credit is that collateral isn’t required. But even with an unsecured line of credit, you’re not completely off the hook if you don’t repay what you borrow. A personal guarantee is what an unsecured line of credit lender will usually require in lieu of business collateral.

Qualifying for an unsecured business line of credit may be challenging, especially when you are a startup or have little to no business credit. You may have better luck getting approved with an online lender, but you risk paying higher interest.

Pros

• No risk to business assets: With unsecured loans, there’s no collateral for the lender to seize if you default.
• Faster funding timeline: Underwriting is typically faster with unsecured loans because the lender can skip the collateral appraisal step.

Cons

• Harder to qualify: Because lenders can’t offset their risk by requiring collateral, they’ll typically set other creditworthy requirements higher.
• Higher interest rates: Unless you have truly outstanding credit, you’ll likely see higher
• May require a personal guarantee: With a personal guarantee, you may lose your own assets instead of the business’s if you hit hard times and can’t repay the loan.

Secured vs. unsecured line of credit: Which is better?

If you’re uncertain about which type of line of credit is better, start by assessing the needs and qualifications of your business. Consider:

• Do you have assets that you can and want to use to back the line of credit?
• How much do you need to borrow?
• Will the credit limit increase for a secured line of credit vs. unsecured?
• Do I meet the qualifications for this type of line of credit?
• Will the line of credit require a personal guarantee?
• Does the secured line of credit offer lower interest rates than an unsecured line?

If you’re an established business with assets you’re willing to put on the line, a secured line of credit is likely a better fit. But if you’re a startup without the finances to guarantee the credit funding, you may have to settle for an unsecured line of credit.

Alternatives to business lines of credit

Business owners may want to explore financing options beyond business lines of credit to find an alternative more tailored to their business needs.

• Business credit cards: Business credit cards provide businesses with a revolving line of credit to access as needed. The limit is often lower than what you’d get with a business line of credit and the interest may be higher and variable, so it is ideal for smaller business expenses.
• Term loan: With a term loan, businesses are given a lump sum to cover various business expenses, including payroll, inventory or the purchase of equipment or real estate. Loan amounts vary by the lender, loan type and business qualifications, but funds are repaid over time, plus interest and fees, according to a specific schedule.
• Crowdfunding: Crowdfunding allows businesses to raise capital through contributions made by individuals and businesses. Crowdfunding has various types, including donation, debt, reward, or equity. Depending on the type, funds are nonrepayable, contributors are repaid, or contributors receive a reward or equity in the business.
• Grants: Businesses looking to avoid taking on debt can benefit from a business grant. Since these funds are nonrepayable, there’s no financial burden, meaning little to no risk. However, this does make the approval for grants competitive.
• Merchant cash advance: Similar to a business line of credit, a merchant cash advance is ideal for businesses with fluctuating revenue. Businesses get immediate access to funds, and it is based on a percentage of their credit card sales.

The bottom line

Considering your business’s financial health, assets and funding needs can help you determine whether a secured and unsecured business line of credit is the right fit to fund your goals. While secured credit lines offer higher limits and lower interest rates, they require collateral — something not every small business has or can afford to risk.

On the other hand, unsecured credit lines don’t need collateral but may come with stricter approval requirements and higher interest rates. The right line of credit can offer flexible access to cash when you need it most. Weighing your options is the first step to getting a business line of credit.

Frequently asked questions

• What happens if you default on an unsecured line of credit?

  If you default on an unsecured business line of credit, the lender may still be able to go after your business assets to repay the loan. It may also seize personal assets if you signed a personal guarantee for the line of credit. To seize assets, the lender may try to take you to court to receive loan repayment.

• What is easier to get: a secured or unsecured line of credit?

  Secured lines of credit may have more relaxed eligibility requirements, allowing businesses with less-than-ideal finances to qualify. However, if you qualify for an unsecured business line of credit, you may have to file less paperwork related to your business assets. The streamlined process may help you receive funding more quickly than a secured business line of credit.

• What credit score is needed for a secured line of credit?

  The required credit score of a secured business line of credit varies based on the lender, but businesses may be eligible with a minimum credit score of 500.