Small business loans can be either secured or unsecured—and the type you choose affects everything from the collateral you’ll need to the rates you’ll pay. A secured loan is backed by an asset your business owns, like property or equipment. An unsecured loan doesn’t require collateral, but approval relies more heavily on your creditworthiness and business financials.
Not all small business loans require collateral, and there are strong options on both sides. In this article, we’ll break down the differences between secured and unsecured business loans, walk through the pros and cons of each, and help you find the right financing option that maximizes funding and minimizes hassle for you.
Key Takeaways
- Collateral Requirement: Secured loans require physical or financial assets as a guarantee, whereas unsecured loans do not.
- Loan Terms: Secured loans generally offer higher funding amounts, lower interest rates, and longer repayment periods.
- Speed of Funding: Unsecured loans typically feature a faster application and approval process, making them ideal for urgent needs.
- Risk Profile: In a secured loan, your assets are at risk if you default; in an unsecured loan, a personal guaranty is usually required instead.
What’s the difference between secured and unsecured small business loans?
Secured Loan: With a secured loan, approval is determined in part by the value of your collateral (also known as ‘security’). Think of collateral as a guarantee for your lender. When you take out a secured loan, the lender places a lien on your collateral—meaning they have a legal claim to that asset if you fail to repay the loan.
Collateral can be physical assets such as property, vehicles, or business equipment, or it can be financial assets such as insurance policies and stock options.
Common examples of secured business loans include:
- Equipment loans — secured by the machinery, vehicle, or equipment you’re purchasing
- Commercial real estate loans — secured by the property itself
- SBA loans — often secured by business assets and sometimes personal assets
- Secured lines of credit — backed by inventory, receivables, or other business assets
There are several advantages to securing a loan amount, including:
- You may be able to get funding even if you have an imperfect credit score
- You may be able to borrow a larger amount than you would have been able without securing the loan
- Secured loans can have lower interest rates and longer repayment periods
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Unsecured Loan: With an unsecured loan, approval is determined by your earnings, credit history, and repayment potential rather than by a pledged asset. That’s why lenders may require you to have a higher credit score to qualify for an unsecured loan.
Unsecured loans tend to be for smaller amounts and may also have shorter repayment periods. Common examples of unsecured financing that are not loans include:
- Business credit cards
- Merchant cash advances
- Some business lines of credit
Unsecured loans are a great option for small business owners who are looking for short-term funding and don’t want to go through the process of pledging collateral. However, you’ll most likely need to provide a personal guaranty in lieu of security.
A personal guaranty is a legal commitment that makes you, the business owner, personally responsible for repaying the loan if your business can’t. It doesn’t require you to put up a specific asset, but it does mean the lender can pursue your personal finances if you default.
Which is better for your business—a secured or unsecured loan?
Which are better: secured or unsecured small business loans? The answer depends on you, the borrower. There are advantages to both types of financing, and the right choice comes down to several factors:
- Your business goals — Are you funding a large expansion or covering a short-term gap?
- Your creditworthiness — How strong is your personal and business credit profile?
- Your available collateral — Do you have assets you’re willing and able to pledge?
- Your funding timeline — How quickly do you need access to capital?
- Your risk tolerance — Are you comfortable pledging an asset in exchange for better rates?
Let’s examine the pros and cons of each type of loan for small business owners.
Secured loans
Pros:
- Larger loan amounts available: Thanks to the collateral attached to secured loans, it is possible to be approved for a much higher amount than an unsecured loan.
- Longer repayment terms: Secured loans typically extend repayment over a longer period, which means smaller periodic payments and more predictable cash flow.
- Lower interest rate: Loans that are secured tend to be lower risk for lenders, which means you may have to pay lower interest rates.
Cons:
- Requires collateral: Some business owners either do not have assets to offer as collateral, or they do not wish to put up their business assets as collateral. If you do not have real estate, financial assets, or any other form of collateral, you may face challenges getting approved for a secured loan.
- Risk of losing your asset: Because the lender holds a lien on your collateral, you could lose the pledged property if you default on the loan. That’s a meaningful risk to weigh, especially if the asset is essential to your operations.
Application process time: Traditional banks may take weeks or even months to approve a secured loan. This delay is not ideal for business owners that require financing fast.
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Unsecured loans
Pros:
- Application process: Unsecured loans may offer quicker approval in some circumstances. If you’re looking to skip the weeks-long approval process, an unsecured loan may offer a faster solution. (Though, when you work with Credibly, you may be able to get funds in hours.)
- No collateral required: Unsecured loans do not require you to put up collateral upfront. However, defaults can trigger a lien on your business.
Cons:
- Lower loan amounts: As collateral is not provided, lenders may not approve loan amounts as high as with secured loans.
- Higher interest rates: Because there’s no collateral backing the loan, lenders take on more risk—and they typically offset that risk with higher interest rates compared to secured options.
How can you tell if your small business loan is secured or unsecured?If you’re unsure about your current loan, here’s how to check:
If you’re still not certain whether your small business loan is a secured or unsecured loan, our team can help you figure it out. |
Frequently asked questions
What can be used as collateral for a secured business loan?
Collateral is the asset you pledge to back a secured loan. If you can’t repay, the lender can take possession of it. Common types lenders accept:
- Real estate: Commercial or residential property you own
- Business equipment: Machinery, tools, or technology your business uses
- Vehicles: Company cars, trucks, or other fleet assets
- Inventory: Stock or goods your business holds for sale
- Accounts receivable: Unpaid invoices owed to your business
- Financial assets: Insurance policies, stocks, or savings
Not every lender accepts every type of collateral. The value of the asset and the lender’s policies both play a role in what qualifies. If you don’t have assets to pledge, an unsecured business loan may be the better fit.
Do unsecured business loans require a personal guaranty?
In most cases, yes. Even though an unsecured loan doesn’t require collateral, lenders usually ask for a personal guaranty. Here’s what that means:
- What it is: A legal promise that you—as the business owner—will repay the loan if your business defaults.
- Why lenders require it: Without collateral to fall back on, lenders use a personal guaranty to reduce their risk.
- Does it apply to secured loans too? Yes. Both secured and unsecured loans can include a personal guaranty. They are separate requirements.
- What’s at risk: If your business can’t repay and you’ve signed a personal guaranty, your personal assets—like savings or personal property—could be at stake.
Before signing any loan agreement, review the guarantee terms carefully. If you have questions about what you’re agreeing to, our team can walk you through it.
What credit score do I need for an unsecured business loan?
Credit score requirements vary by lender, but here’s a general guide:
- 550–649: Some alternative lenders may approve you, but expect higher interest rates and lower loan amounts.
- 650–699: You’ll have more options and better terms with most online and alternative lenders.
- 700+: Strong approval odds with more favorable rates and higher borrowing limits.
Keep in mind that lenders don’t look at credit scores alone. They also weigh your monthly revenue, time in business, and overall financial health.
If your score isn’t where you’d like it, you still have options. Secured loans may be easier to qualify for since collateral reduces the lender’s risk. You can also explore bad-credit business loans designed for owners still building their credit profile.
Get help from a financing expert
Financing can be complicated, but you don’t have to be confused. Whether a secured or unsecured option is the better fit, Credibly provides an accessible alternative to traditional bank financing—with approvals in as fast as 2 hours and funding in as little as 4 hours.
Here’s how our products map to what you’ve learned:
- Looking for secured financing? Our equipment loans use the equipment itself as collateral, which can mean favorable terms and easier qualification.
- Prefer unsecured options? Our working capital loans and merchant cash advances are designed to get you funded without requiring you to pledge specific assets.
Our customer service team is friendly, highly knowledgeable, and based entirely in the U.S. We’re here to answer all your questions about the financing application process, financing options, and more.
