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, and each has advantages and disadvantages.

What is the difference between unsecured and secured business loans?

Most business loan types can be secured or unsecured. For example, the same lender might offer both a secured and an unsecured line of credit, each with differing loan amounts and eligibility requirements.

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.

Unsecured loans are typically offered to borrowers with higher credit scores. These types of loans do not require collateral because the lender trusts they will repay the loan due to their favorable credit history. 

Unsecured business loans often require a personal guarantee, though. The personal guarantee allows the lender to pursue the guarantor’s personal 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 loans Unsecured business loans
Collateral required No collateral required
Lower interest rates Higher interest rates
Typically available to borrowers with minimal credit history or low credit scores Typically requires 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 Typically, lower borrowing limits because the loan isn’t backed by collateral
May require a personal guarantee Usually requires a personal guarantee

Secured loan pros and cons

Pros:

Cons:

  • The lender can seize the assets you used as collateral if you don’t pay the loan as agreed. 
  • You must offer acceptable collateral in terms of type and monetary value.
  • Your collateral’s value must be appraised, a potentially time-consuming step.

Unsecured loans pros and cons

Pros:

  • The lender will need to sue you for your assets if you don’t make your loan payments. 
  • The application process may be simpler because you don’t have to get your collateral’s value appraised.

Cons:

  • Your lender can still use legal action to come after your business and personal assets if you default on the loan. 
  • Unsecured loans often have higher interest rates. 
  • Lenders often require higher minimum credit scores. 

Should I get a secured or an unsecured business loan?

Both secured and unsecured business loans have advantages and disadvantages, so deciding which is right for you can be hard. Start by seeing if you qualify for each option. If you don’t have the credit score needed for an unsecured business loan, your only option may be secured loans. If you don’t have assets you can use as collateral, you need to focus on unsecured loan options. 

If you can qualify for both types of loans, weigh the risks of each loan type. 

A secured loan comes with the possibility of losing your business assets. An unsecured loan will likely cost more with higher interest rates. 

If you are unsure about your ability to make timely payments on the loan, the higher cost of an unsecured loan could be worth it. But if you are confident you can generate the income needed to make timely payments, a secured loan may save you money in the long run. 

Evaluate your business’s strengths to decide what’s best for you.

FAQs 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 both 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.