A small business loan can be either secured or unsecured, depending on your unique situation and needs. Businesses with substantial assets often opt for secured loans, while those needing faster funding may pursue unsecured loans.
Nearly all businesses seek funding at some point, whether through secured or unsecured loans. According to a Federal Reserve study, half of all businesses currently have a loan, and 33% of business owners applied for a new loan in 2024. Understanding the difference between the loan types can help you choose the best fit for your funding needs.
Let’s explore the difference between unsecured business loans and secured ones, review the pros and cons of each loan type, and offer tips to help you pick the best option for your business.
Secured vs. unsecured business loans: What’s the difference?
Collateral is the main difference between a secured vs. unsecured loan. A secured loan will be backed by business assets like inventory, equipment, real estate, etc. If you fail to pay the loan, the bank can seize these assets. An unsecured loan is not backed by assets; it’s issued based on creditworthiness.
Collateral (or its absence) directly impacts loan terms and funding speed.
As you can see above, having collateral for a secured business loan gives you access to more favorable terms, however, an unsecured business loan will get you the capital you need faster.
Secured business loan pros and cons
When evaluating a secured business loan in comparison to an unsecured one, there are several pros and cons worth considering.
It’s important to weigh the upsides and downsides of a secured loan when looking at your business financing needs. Funding takes time, regardless of the loan amount.
Unsecured business loan pros and cons
Comparing an unsecured business loan to a secured loan, there are a few noteworthy pros and cons.
One of the biggest benefits of unsecured loans is the speed of the application process and receiving funds. An unsecured loan can also be a flexible option when you don’t have significant business assets, however, you’ll need to balance that against the disadvantages of this type of loan.
How to choose between secured and unsecured business loans
Deciding between a secured and unsecured loan for your business requires a clear understanding of your financing needs. Ask yourself: What will the funds be used for? Are you willing to provide collateral? How quickly can you repay the loan?
A secured business loan can be a good option when you:
- Need a longer repayment term
- Are willing to risk significant assets
- Want a large loan with favorable terms
- Have a limited business credit history
An unsecured business loan may be the better choice if you:
- Need funds fast to take advantage of limited-time opportunities
- Don’t have collateral for a secured loan
- Hold enough assets but don’t want to risk them or wait for appraisals
- Have a strong credit history and business credit score
Many lenders offer unsecured and secured loans, and your business may qualify for both. Banks, on the other hand, almost always need collateral. When eligibility isn’t an issue, focus on the advantages and disadvantages of each to choose the best fit.
Harness your growth potential with National Business Capital
No strict rule dictates whether a small business loan must be secured or unsecured. Each type has its advantages and disadvantages, and the application process differs between secured vs. unsecured loans. When choosing a lender for your small business loan, finding a partner that provides you with multiple lending options offers you unbeatable flexibility.
National Business Capital can help you find a competitive financing offer, whether you’re looking for a small business loan, business line of credit, or other type of funding. With a team of expert business advisors, we can help your business secure the capital you need to grow your business with confidence. Get started on your digital application today.
Frequently asked questions
Nearly any type of business asset can be used to secure a small business loan, including inventory, equipment, invoices, investments, and more.
Even personal assets can sometimes be used as collateral for a business loan. Using your warehouse space as collateral for an expansion is one example of a secured loan. Just be aware that your assets may need to be appraised before you can use them for collateral.
Check your loan agreement and look for clauses mentioning collateral or liens on your business assets. If you find these clauses, then your loan is a secured one. You can also contact your lender directly and ask them to clarify whether or not your small business loan is secured or unsecured.
Most SBA loans are secured, but unsecured options exist. For instance, low-value loans are often unsecured (under $50,000).
A secured SBA loan may use business assets for collateral, require a personal guarantee, or both.
One common use for a small business loan is the purchase of equipment. When securing equipment financing, the loan will most often be secured by the equipment itself. Similar to how an auto loan is secured by the vehicle you are purchasing.
Alternatively, you could apply for a small unsecured term loan or a business line of credit to pay for the equipment. With this type of financing, the equipment you are purchasing will not be used as collateral to back the loan.
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