Secured vs. unsecured business loans: Which is right for you?
Learn more about secured and unsecured business loans to see which might be the best fit for your business. Presented by Chase for Business.
- Secured business loans often require borrowers to provide collateral, while unsecured business loans do not.
- Unsecured loans may have higher interest rates, shorter terms and stricter approval criteria than secured loans.
- Deciding between a secured or unsecured business loan may depend on your business's financial health, credit standing and funding needs.
Whether you are buying seasonal inventory, bridging the gap between payroll and delayed client invoices or purchasing heavy equipment for a second location, securing the right financing can be a pivotal step in your business’s growth and stability. Knowing the distinctions between secured and unsecured business loans—two common business loan types—can be helpful when finding a suitable option for your growth strategy.
In this article, we’ll explain how secured and unsecured business loans work, some of their main differences and factors to consider when determining which is best for your business.
What is a secured business loan?
A secured business loan is financing that requires you to pledge collateral. Collateral is an asset like equipment, real estate, inventory or accounts receivable that is provided as backing for the loan in case the borrower defaults on the loan.
Collateral reduces the lender's risk if you are unable to pay back the loan. With a secured loan, if you default, the lender can claim the asset you put up as collateral. This arrangement often can make it possible for businesses to qualify for higher loan amounts, longer timeframes to repay and lower interest rates.
Because lenders can use collateral as recourse, qualification standards for secured loans might be less strict, making them accessible to businesses with limited credit histories.
What is an unsecured business loan?
An unsecured business loan does not require collateral. Instead, lenders base approval on your business's overall strength, including creditworthiness, financial performance and repayment ability. This type of loan may be a preferred option for service-based businesses that lack physical assets or e-commerce brands that need working capital fast.
Unsecured business loans and business lines of credit usually offer lower borrowing amounts compared to secured loans. Qualification for unsecured loans typically calls for a higher tier of credit, healthy cash flow and a proven record of handling debt.
Because collateral isn't necessary, the unsecured loan application process can be quicker and more straightforward. However, requirements may be stricter, and lenders may ask you to sign a personal guarantee, which means you are personally responsible for repaying the debt if the business cannot.
Differences between secured and unsecured business loans
When comparing secured and unsecured loans, it can be helpful to look at their borrowing limits, terms, collateral requirements and how quickly you’re able to access funds.
Borrowing limits
Secured and unsecured business loans often provide different funding levels. With collateral to back the loan, business owners can typically access higher borrowing limits with a secured business loan. Loan sizes are generally smaller with unsecured loans since lenders take on more risk.
Repayment terms
Secured loans may offer longer repayment periods, which may provide more flexibility to manage your cash flow and keep monthly payments low. Unsecured loans may need to be repaid over a shorter period, often from several months to a few years. Without collateral to back the loan, lenders may require faster repayment.
Collateral requirements
Collateral is a main point of distinction between the two loan types:
- Secured business loan: Requires assets as collateral, such as property, equipment or inventory.
- Unsecured business loan: No collateral needed, but a personal guarantee is typically required.
Time to access funds
The timeline for receiving your funds may also vary. Secured business loans usually have a longer approval process. The lender has to evaluate and appraise the collateral, which can include documentation, third-party appraisals and more paperwork.
In contrast, unsecured business loans may offer quicker application and funding since there's no need to review collateral as part of the loan approval process.
Choosing the right type of loan
Determining whether a secured or unsecured business loan may be a good fit often requires weighing several key factors, including your business's needs, available resources and your comfort level with risk.
Here are a few things to consider:
- Credit score and history: A stronger business credit profile can make unsecured loans more accessible, while secured loans may be available to those with less established credit.
- Amount of funding: If you need a larger sum for major equipment or a facility expansion, a secured loan or secured line of credit may provide higher borrowing limits than unsecured loans.
- Repayment terms: You may want to calculate debt service coverage ratio (DSCR) and decide whether you want more time to pay off your loan or if quick repayment suits your business strategy.
- Collateral availability: If you have assets and are comfortable with the potential risk, a secured loan may offer more competitive terms.
- Interest rates and fees: Secured loans usually have lower interest rates, while unsecured loans often charge more due to increased risk. It can be helpful to review all associated costs when determining the best option.
- Speed of funding: If you're on a tight timeline, unsecured loans may provide faster access to funds.
- Personal guarantees: Unsecured loans generally require a personal guarantee, making you personally liable if your business defaults.
You might want to keep in mind both your business's present and future needs while reviewing these factors. It may also be helpful to review a business loan application checklist before speaking with a business banker who can review your specific cash flow cycle and help you identify which credit options might fit your situation best.
Frequently asked questions
What's the main difference between a secured and unsecured business loan?
A secured loan needs collateral, while an unsecured loan does not. This typically influences qualification requirements, interest rates and how much you can borrow.
Are SBA loans secured or unsecured?
Small Business Administration (SBA) loans can be either secured or unsecured depending on the specific loan program, the amount borrowed and the lender's requirements. However, most SBA loans are secured loans, and the SBA may require collateral for loans over $50,000.
Are interest rates generally higher for unsecured business loans?
Yes, unsecured business loans typically have higher interest rates since they represent a higher risk to the lender.
Do unsecured business lines of credit provide as much funding as secured ones?
Unsecured business lines of credit usually have lower limits compared to secured loans.
How quickly can I be approved for a business loan?
Approval times vary, but unsecured loans can be processed faster because there is no physical collateral to appraise or assess.
