Loans can be divided into two categories: secured and unsecured. Secured loans require a borrower to back their loan with collateral, such as property, financial assets, or other valuables. That means that if the borrower doesn’t repay the loan, the lender can seize this asset to recoup their losses. An unsecured loan, on the other hand, has no collateral requirements.
When you’re borrowing for a small business, it’s important to know which type of loan you’re getting. Whether or not your loan is secured can have a major impact on the overall cost of the loan and what happens if you aren’t able to pay it back.
Key Points
• Secured loans require the borrower to put up collateral such as property or financial assets, while unsecured loans have no collateral requirements, creating fundamental differences in borrower risk.
• Secured loans may offer larger loan amounts, lower interest rates, and longer repayment periods because collateral reduces lender risk.
• Unsecured business loans can have higher interest rates, shorter terms, smaller loan amounts, and stricter qualification requirements due to greater lender risk.
• Loan agreements can reveal whether a small business loan is secured or unsecured debt if you check the documentation for mentions of collateral, UCC liens, or personal guarantees.
• Lenders may require personal guarantees for businesses lacking sufficient assets or credit history, so that the business owners can be held personally responsible for debt repayment.
Secured vs Unsecured Small Business Loans
Whether or not a small business loan is secured or unsecured has big implications for the loan terms and cost. Because secured loans represent less risk for the lender, they tend to come with several advantages. First, you may be able to access larger amounts of money than you would with an unsecured loan. What’s more, lenders might offer you lower interest rates — which can reduce the overall cost of borrowing — and they could permit longer repayment periods.
Choosing a secured loan and providing collateral can often make it easier to qualify for financing, which can be helpful for businesses that are just getting off the ground and may not have a long credit history.
Unsecured business loans tend to be more expensive, with higher interest rates and potentially shorter loan terms. Lenders may be less willing to offer large loan amounts, and these loans may be harder to qualify for, since the lender incurs more risk than with a secured loan.
Recommended: Business Loan Calculator
How to Tell If a Small Business Loan Is Secured or Unsecured
Curious about whether a specific small business loan or startup business loan is secured or unsecured? The best way to tell is by reading the loan agreement. Take a look at the fine print and hunt for a mention of collateral — such as equipment or real estate—as well as reference to Uniform Commercial Code (UCC) liens or personal guarantees. If your loan agreement includes any of the above, it’s a secured loan.
Collateral Requirements
Collateral is a pledged asset that provides security for a loan. When a bank lends you money, they are taking on the risk that you might be unable to pay them back. To help offset some of this risk, the bank has a legal claim on your assets, allowing it to take the collateral if you default.
For example, a small business might pledge a building or an expensive piece of equipment it owns to back the loan. If the business doesn’t repay the loan, the lender can seize these assets and sell them to recoup some of the money it lost.
In addition to real estate and equipment, other examples of collateral can include vehicles, financial assets — such as stocks, bonds, or savings accounts — and even the cash value of some insurance policies.
UCC Liens and Other Lender Filings
Your lender may also require a UCC lien. This is the legal document that allows your lender to seize the business assets you’ve put up if you’re unable to pay back your loan. The lien isn’t another form of collateral; rather, it’s the legal notice that establishes the lender’s claim to that collateral.
Your lender might file a UCC lien on a specific asset, or it might file a blanket lien, which allows the lender to seize all of your business assets.
Certain small business loans, business lines of credit, and credit cards are truly unsecured, meaning you don’t have to back them with any of your assets. However, some “unsecured loans” may require a UCC lien, which allows the lender some recourse if you default, or a personal guarantee.
Personal Guarantees and When They Apply
In some cases, if your business doesn’t have sufficient assets to back a loan, or if it’s a new business without a strong credit history, your lender may ask for a personal guarantee. This means it will hold you personally responsible for the debt and will be able to seize your personal assets to pay it off if your business defaults.
Some unsecured loans – for which you don’t pledge any specific assets – may require personal guarantees.
Common Types of Secured Small-Business Loans
There are several types of secured small-business loans, including:
• Business term loans: When you take out a business term loan, your lender offers you a lump sum that you agree to pay back, with interest, over a set period of time. These include many common small business loans and are typically used for large, one-time expenses.
• SBA loans: Government-backed Small Business Administration (SBA) loans are often less risky for lenders to issue. They tend to be easier for borrowers to qualify for and may come with better terms and interest rates than many other loans. An SBA loan calculator can help you understand the financial commitment involved in taking out one of these loans.
• Equipment financing: An equipment financing loan is specifically designed to help cover the cost of machinery or equipment, which itself is typically used as collateral for the loan.
• Commercial real estate loans: These loans are designed to help buy buildings needed for the business. They are typically backed by the real estate itself.
• Secured lines of credit: A secured business line of credit is a form of revolving credit backed by an asset. It allows you to borrow up to a certain credit limit, repay what you’ve taken out, and again borrow up to your designated limit.
Recommended: Business Checking
Common Types of Unsecured Small-Business Loans
There are also several unsecured loan options for small businesses, including:
• Unsecured term loan: You may be able to find options to take out unsecured term loans as well as secured ones. For instance, personal loans typically don’t require collateral. However, some personal loans restrict the use of funds for business purposes, so check whether it’s allowed before you apply.
• Business line of credit: There may also be unsecured business lines of credit available. These work much like their secured counterparts. However, they may require higher interest rates and offer lower credit limits.
• SBA Microloans: The SBA Microloan program provides businesses the chance to borrow up to $50,000. The average microloan is about $13,000.
• Business credit card: Another form of revolving credit, a small business credit card is typically unsecured and allows you to borrow money up to a specified credit limit. Once that’s repaid you can continue to borrow up to that amount. Be aware that if you carry a balance from month to month, you will owe interest, which can increase your debt, especially if you make only minimum payments.
Which May Be Better for Your Business?
You might decide to use a secured loan if you need to borrow a relatively large amount of money for a big purchase like machinery or real estate. Secured loans can also be easier to qualify for if you have poor credit.
Unsecured loans may be more appropriate when you need smaller amounts of money quickly. Businesses with excellent credit may be able to find better deals on interest rates.
What Lenders Consider Besides Collateral
In addition to collateral, lenders will also look at other factors when approving a loan, including how long your business has been in operation, your credit score, and your business cash flow. They’ll also want to see that you have a plan for the money and can explain how it will boost your revenue,
The Takeaway
Understanding the implications of whether a small business loan is secured or unsecured debt can help you make smart choices about what tools you need to grow your business and the risks you’re willing to take on. Secured loans may offer lower interest rates and longer terms, but they also put specific assets on the line. Unsecured loans preserve flexibility and protect business assets, yet typically come with higher costs and stricter qualification standards. The type that’s right for you depends on many factors, including how established your company is and the purpose of the loan.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What is the difference between a secured business loan and an unsecured business loan?
A secured business loan requires that you put up collateral to back the loan. Fully unsecured business loans have no collateral requirements.
Do small business loans require collateral?
Most small business loans do require collaterals, especially larger loans. There are some, such as Small Business Administration (SBA) Microloans, that don’t require collateral, however.
Is a personal guarantee the same as collateral?
A personal guarantee is not the same as collateral, but it functions in a similar way. It provides lenders with access to valuable assets that they can seize should the borrower be unable to pay back the loan.
What is a UCC lien and how does it affect a business loan?
A UCC lien gives a lender a legal claim to business assets. The availability of these assets can often affect the terms a lender is willing to offer for a business loan, including potentially lower interest rates or longer repayment terms.
Can you get an unsecured small business loan with bad credit?
It may be possible to get an unsecured small business loan with bad credit, but your options will likely be limited. You can expect lower loan amounts, higher interest rates, and stricter terms.
Photo credit: iStock/Matinee Duangphet
SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
SOSMB-Q425-106