The difference between secured and unsecured business loans is that secured business loans have physical collateral that a lender can claim and sell if the borrower defaults, and unsecured business loans do not require physical collateral. Unsecured business loans may require a personal guarantee or have a UCC filing created, rather than needing physical collateral, to reduce the lender’s risk.
If the borrower defaults on payments, the lender can put a lien on the borrower, which can impact their business credit score, personal credit score, and their ability to get financing in the future.
Types of Secured & Unsecured Business Loans
Some business loans can be secured or unsecured. It depends on the borrower’s financial and business history combined with the lender’s comfort levels. Here are some examples of when a type of loan could be either secured or unsecured and when it’s more likely to only fall into one category.
| Secured | Unsecured | |
| Small business loan | X | X |
| SBA loan (under $50,000) | X | X |
| SBA loan (over $50,000) | X | |
| Emergency loans | X | X |
| Short-term inventory loan | X | |
| Equipment financing | X | |
| Payroll loan | X | |
| Bridge loan | X | |
| Line of credit | X | |
| Invoice financing | X | |
| Working capital loan | X | X |
Secured business loans can include traditional term loans with set payback periods and equipment financing loans where the equipment is listed as collateral. Traditional term loans can also be unsecured, but the more common types of unsecured financing include lines of credit, short-term loans, and cash advances where the lender has a lot of trust in the borrower.
Unsecured business loans are more appealing for borrowers because there is less risk if they cannot repay the debt, and that’s the same reason lenders are less likely to provide them. In order to get an unsecured business loan, you’ll need to have a strong financial business history, a good relationship with the lender, and enough assets that can be liquified in order to build the lender’s confidence and trust in you.
If you need a larger amount of money because you’re expanding your business footprint or increasing production, you’ll likely be getting a secured business loan because there is more risk with the unknown factors. In this situation, you also have assets the lender can request as collateral, unlike a start-up that is still in the first stages of business. Further, the lender will likely do a UCC filing on specific assets in case you default.
When you only need financing to cover inventory for an upcoming busy season and have a track record of selling out your products, unsecured loans may be an option. By providing the right documentation, you can show your lender the high likelihood that the loan will be paid back quickly, building their trust and potentially eliminating the need for collateral.
Payroll and some working capital loans can be secured or unsecured depending on your business history and the reason why you’re taking the loan. If you run an agricultural business like a farm and need to fund payroll for training summer workers, a food stand, or a summer farm camp for kids, you may be able to get these loans unsecured.
If you’re in a downturn and need a loan to make payroll until the market rebounds, lenders will likely only provide a secured business loan, as there is more risk with your situation. Both are business loans to cover payroll, but one situation has a larger risk, so collateral is needed to get the financing required to keep business running.
SBA loans are also available in both secured and unsecured variations. If the loan is under $50,000, the lender may not require any collateral as the government is taking on part of the risk. Anything over this amount will be required to be secured as per SBA guidelines.
Disaster relief and emergency loans could also be available as unsecured loans, since they involve situations where collateral may not be available. The loans normally close quickly as they come from alternative lenders who are experienced in providing funding for these urgent situations.
Secured vs. Unsecured Loans: Interest Rates and Credit Impact
The interest rates are higher for unsecured loans because there is more risk and your assets might not be available to cover the lender’s losses. Let’s say your business was impacted by power outages where perishable items spoiled. If you have assets that you can put up as collateral, you can likely take advantage of lower interest rates because you’re reducing the lender’s risk.
Both secured and unsecured business loans can impact your business credit score and come in multiple forms like small business loans, SBA loans, and cash advances. Secured business loans will require you to risk your assets if you default, while unsecured business loans require the lender to take on more risk, making this type of financing more difficult to obtain. These are the main differences between the two loan types so you can be prepared and choose the option that’s right for you as you’re evaluating your financing opportunities.
