Secured vs. Unsecured Business Loans - Learn the Difference (2024)

FAQs

What is the difference between secured and unsecured business loans? ›

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, each with advantages and disadvantages.

With a secured loan, you must provide collateral (a valuable asset such as a home or car) as security in case you can't pay back your loan. Unsecured loans, on the other hand, don't require any collateral.

With a secured business loan, financing is secured by a valuable asset that you own (such as accounts receivable, a home or equipment) as collateral. With an unsecured loan, you are not required to provide an asset as collateral. Seen as less risky for lenders which means a lower interest rate, usually 2.5% to 13%.

Even though the SBA guarantees most of the loan for the lender, collateral is still (almost always) required to secure the loan. As the borrower, you'll be required to put up your most valuable assets — typically your home — as collateral for the loan.

Typically, interest rates on unsecured loans are higher than rates on secured loans because the lender has a higher risk level of the loan not being repaid. Unsecured loans may be difficult to obtain if you do not have much positive credit history or don't have a regular income.

Key takeaways. Secured and unsecured credit cards have similarities, but they are different types of credit cards. Secured cards require a deposit, unlike unsecured cards. Compared to secured credit cards, unsecured credit cards may have lower interest rates and fees and higher credit limits.

Risk: Unsecured loans may be a safer choice for some borrowers. If you fail to repay, only your credit will be affected. Some lenders allow you to go on a hardship plan if you can't make your monthly payments.

A secured loan can help you build credit if you make all payments on time, but since secured loans are backed by collateral, there is risk involved. Other credit products could help you build credit without as much risk.

Most people have a loan secured by property, such as a mortgage or a car loan. These debts, called "secured debts," can be tricky in Chapter 7 bankruptcy. Although you can wipe out or "discharge" a secured loan in Chapter 7 bankruptcy, you'll lose the property you purchased if you don't pay for it after bankruptcy.

Secured loans require that you offer up something you own of value as collateral in case you can't pay back your loan, whereas unsecured loans allow you borrow the money outright (after the lender considers your financials).

What happens if you don't pay back a secured loan? ›

Your asset gives the lender extra “security” that you'll repay the loan. If you default on a secured loan, the lender can take your asset and sell it to recoup the unpaid loan balance. Secured loans are typically easier to qualify for and have lower interest rates because they pose less risk to the lender.

Differences Between Secured and Unsecured Creditors

Since the borrower has more to lose by defaulting on a secured loan, and the lender has an asset to gain, this type of debt carries less risk for the lender. As a result, secured debt generally comes with lower interest rates when compared to unsecured debt.

No collateral or personal guaranty is required. PPP loans are unsecured.

Drawbacks of SBA Loans

Less competitive rates and terms versus banks. Generally, the most competitive interest rates are available through traditional bank loans, though SBA loans do often offer lower costs than some online lenders. Long approval times. SBA loans can take a long time to fund, up to two to three months.

Typically, lenders look for businesses with a strong credit history, profitable operations, and a minimum of one to two years in business. Specific requirements can vary by lender but generally include a detailed review of financial statements, business tax returns, and personal tax returns of the business owners.

Unsecured business loans don't require collateral.

Or your assets may already be committed as collateral to the maximum amount. An unsecured loan is only backed by your good creditworthiness, so no collateral is involved.

Unsecured loans include personal loans, student loans, and most credit cards—all of which can be revolving or term loans. A revolving loan is a loan that has a credit limit that can be spent, repaid, and spent again. Examples of revolving unsecured loans include credit cards and personal lines of credit.

Secured loans are loans that are secured by a specific form of collateral, including physical assets, such as property and vehicles, or liquid assets, such as cash. Both personal loans and business loans can be secured, though a secured business loan may also require a personal guarantee.

A small business line of credit is typically offered as unsecured debt, which means you don't need to put up collateral (assets that the lender can sell if you default on the debt). Many unsecured lines of credit come with a variable interest rate and are available for sums ranging from $10,000 to $250,000.