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

Small business loans can be secured or unsecured. Secured loans require collateral to back your loan. Unsecured business loans do not require any collateral. Lenders may offer one or both of these small business loan options, each with advantages and disadvantages.

Secured or unsecured small business loan: What’s the difference?

Most business loan types can be secured or unsecured. 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. The lender can seize the collateral if the borrower defaults.

A low-interest unsecured small business loan is typically offered to borrowers with higher credit scores. These loans don’t require collateral because the lender trusts they will repay the loan due to their favorable credit history. Types of low-interest unsecured loans include term loans and business lines of credit.

There are unsecured business loans for bad credit, but these are considered high-risk loans. Since there is more risk involved, lenders will assess higher interest charges or factor rates and may tack on additional fees. Depending on the lender, high-risk unsecured business loans may include term loans, business lines of credit and merchant cash advances.

Unsecured business loans often require a personal guarantee, though. The personal guarantee allows the lender to pursue the guarantor’s assets. Typically, lenders require all business owners with a certain percentage stake or higher to provide a personal guarantee.

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.


  • Lower minimum interest rates than unsecured loans
  • Lenders often allow higher borrowing limits
  • It’s easier to qualify for a secured loan


  • 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.


  • Doesn’t require business collateral
  • May offer faster funding since there is no appraisal process


  • 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?

Choosing between a secured or unsecured small business loan depends on factors like your credit score and whether you have assets to secure the loan. 

Secured loans are a good fit if:

  • You’re a startup business owner and don’t have 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.

If you can qualify for both types of loans, weigh the advantages and risks of each loan type before determining what is best.

Bottom line

Both secured and unsecured 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 $25,000 or less. If the loan amount exceeds $350,000, 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.