Is it easier to qualify for a secured or unsecured loan?

It's typically easier to qualify for a secured loan because you will be providing collateral, making a lender more likely to approve financing for applicants with a lower credit rating or a minimal business credit history.

How do you get an unsecured business loan?

You may be eligible to get an unsecured loan if your business has good cash flow and a high credit score. Lenders may also require you to have operated your business for two years and have a certain amount of revenue to qualify.

Can I use personal assets as collateral for a business loan?

Yes, you may be able to use personal assets as collateral for a business loan. However, you will want to weigh the risks involved in putting up your home, personal vehicle or other holdings as collateral.

How much more will I pay in interest with an unsecured loan?

The amount of interest you pay on an unsecured loan varies by lender and depends on the rate. You can use this calculator to compare loan terms and rates.

How do I check the balance on my business loan?

Depending on the lender, you may check the balance on your business loan by logging on to your online account, contacting the lender by phone or reviewing loan statements.

What happens if I default on a secured business loan?

If you default on a secured business loan, the business assets you pledged as collateral may be seized by the lender to repay the loan.

What happens if you default on an unsecured business loan?

If you default on an unsecured business loan, you may be referred to a collection agency or be sued by your lender for payment. This could result in your wages being garnished, a lien on your bank accounts and/or personal assets being seized if you guarantee the loan personally.

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Secured vs. Unsecured: What type of business loan is right for you?

Updated

9 min. read

- A secured versus an unsecured loan can affect the amount you can borrow, how fast you can get funding and your cash flow.
- The main difference between a secured and an unsecured business loan is that a secured loan requires collateral to back the financing.
- Some key considerations between the two types include an evaluation of assets, financing needs, credit history and business history.

If you're looking to expand your business to a new location, purchase equipment or boost seasonal inventory, you may need financing in the form of a secured or unsecured business loan.

While a lender’s policies may dictate which businesses qualify for secured vs. unsecured loans, understanding the difference is key. Your loan type may affect the amount you can borrow, how fast you can get funding, and — depending on your monthly payment — your cash flow.

Here's a closer look at secured vs. unsecured business loans to help you make business lending decisions for your enterprise:

Secured vs. unsecured business loans: What's the difference?

The main difference between a secured versus an unsecured business loan is that a secured loan requires some type of collateral to back the financing.

What is collateral?

Collateral is a way to make a loan less risky for the lender by having the borrower pledge business assets such as equipment, inventory or real estate to the lender. If you’re unable to repay the loan, the lender may take ownership of some or all the business assets.

Examples of collateral include:

Real estate: Brick-and-mortar assets such as a retail store, commercial bakery, or office space are commonly used as collateral for real estate-related financing.
Equipment or machinery: If you’re a small manufacturer looking to finance a revenue-generating asset like a new product line, you may consider using existing equipment or the machinery being financed as collateral.
Inventory: When you have cash needs driven by seasonal promotions or growth, using inventory as collateral may be an option to weigh. For example, a retailer looking to purchase holiday stock could use inventory to collateralize the loan.
Accounts receivable: This type of collateral may be used when cash flow gaps arise from payment delays by vendors or customers. You would receive a loan amount that is a percentage of your accounts receivable. Should you be unable to pay back the loan, the lender would collect the accounts receivable.
Blanket lien: Business assets such as equipment or machinery, inventory and accounts receivable can be bundled into a blanket lien covering multiple asset types.

What is a secured business loan?

A secured business loan is backed by collateral — this makes the loan less risky for a lender and may result in more favorable terms for borrowers compared with unsecured loans. This type of financing may be a good fit for businesses making larger investments, planning for long-term growth or looking to reduce borrowing costs over time.

Examples of secured loans include:

Term loan: These are repaid on a predetermined schedule and may have a fixed or variable interest rate.
Equipment leasing: You may only use this type of loan for equipment investments — the loan amount is pegged to the purchase price, and the terms are based on the projected lifespan of the machinery.^{footnote 1 1} footnote 1
Business line of credit: Similar to a credit card, this type of financing lets you draw loan amounts on an as-needed basis — up to a pre-set limit. A secured business line of credit will require some form of collateral as backing.
Business real estate loan: This is used to purchase or refinance real property for a business and is similar to a mortgage for a home, but with key differences:
- A larger down payment may be required than with a residential property
- The terms may be shorter than the typical 30-year home mortgage
SBA loan: Backed by the federal government, an SBA loan may offer lower interest rates than some other types of commercial financing.

Advantages of a secured business loan

Here are some potential benefits of a secured business loan:

Lower interest rates: Secured business loans may come with lower interest rates and may offer larger borrowing amounts than unsecured loans.
Higher borrowing limits: Secured loans tend to offer access to larger loan amounts than unsecured financing, generally making them well-suited for major investments, such as purchasing real estate or acquiring equipment.
Longer repayment terms: You may be eligible for a longer repayment period, making it easier to budget and forecast.

Disadvantages of a secured business loan

A secured business loan may not work for your situation — here are some potential disadvantages:

Longer funding process: The approval process may take longer for secured loans, as lenders may require additional time for steps like asset valuation and reviewing income statements and other business documents.
Risk to assets: Should you default on the loan, you may lose key assets such as real estate, equipment or inventory.

A secured business loan uses collateral to back the loan and may offer lower rates, higher borrowing limits and longer repayment terms. Common examples include term loans, equipment financing, lines of credit, real estate loans and SBA loans.

What is an unsecured business loan?

An unsecured business loan is not backed by collateral, making it riskier for a lender and usually requiring a strong credit history from the borrower. Unsecured business loans are often chosen for speed and flexibility, but that convenience may come with higher interest rates or lower borrowing limits.

Examples of unsecured business loans include:

Business credit card: A business credit card can help you fund operations, order inventory and pay vendors while you're in a start-up phase or waiting for payments for goods or services. However, it may require strong credit to qualify and may also incur higher interest than other types of loans or credit.
Business line of credit: Similar to a credit card, this type of financing lets you draw loan amounts on an as-needed basis — up to a pre-set limit. An unsecured business line of credit may be approved more quickly than a secured loan, but it may also have stricter credit requirements and charge higher interest rates than a secured line.

Advantages of an unsecured business loan

Depending on your type of business and other factors, an unsecured business loan may support your business goals. Advantages include:

Faster funding process: You may receive a decision more quickly than with a secured loan, because the process is not dependent on asset valuation — making unsecured loans more attractive for short-term needs.
No risk to assets: Unsecured loans are not backed by collateral, so if you are not able to pay back the loan, you may not have to forfeit business property, equipment or inventory.

Disadvantages of an unsecured business loan

An unsecured business loan may not be right for every circumstance, with potential disadvantages including:

Higher borrowing costs: Because the funds are not backed by collateral, interest rates for unsecured loans tend to be higher.
Lower borrowing limits: Similarly, without collateral being provided, unsecured loans tend to offer smaller amounts to help reduce the risk for the lender.Qualifications may be stricter: It may be harder to get approved for an unsecured loan, as lenders may have credit policies that dictate a set of criteria a borrower must meet to qualify.
Qualifications may be stricter: It may be harder to get approved for an unsecured loan, as lenders may have credit policies that dictate a set of criteria a borrower must meet to qualify.

An unsecured business loan doesn’t require collateral, offering faster access to funding and greater flexibility for businesses with strong credit. Common options include business credit cards and lines of credit, though they may come with higher interest rates, lower borrowing limits and stricter approval requirements.

What to consider before choosing between a secured or unsecured loan

To choose between a secured and unsecured loan, you may consider your financing strategy and structure, and how the loan aligns with overall goals, risk tolerance and cash flow. Before you make a final decision about a secured versus unsecured business loan, you may want to discuss your situation with a business banker who can help answer key questions, including:

Are you taking on too much risk with your business assets?
Do the terms accurately reflect your credit profile?
Would a different loan structure help improve your cash flow?

Here are some other key considerations for a secured versus unsecured business loan:

1. Assets

If you're considering a secured loan for a major purchase, you will want to evaluate your assets to determine which might be used for collateral. However, professional firms and service-based businesses may not have significant assets, making unsecured or partially secured financing potentially a more viable option.

2. Financing needs

Some key questions to ask include: How much are you looking to borrow, and how quickly do you need the funds? How will you use the business loan — are the funds meant for making long-term capital improvements, perhaps indicating a secured loan, or to fill short-term cash needs, perhaps through an unsecured loan?

3. Credit history

If you're a brand-new business, you might have a short credit history or limited assets, which can make it harder to qualify for an unsecured loan. An established business, by contrast, may be able to more easily qualify for an unsecured loan.

4. Business history

Generally, secured loans may work best for established businesses that are planning a major expenditure and would benefit from the stability and lower costs of secured financing. By comparison, unsecured loans may work best for early-stage businesses that have strong credit and are seeking quick, flexible funding for smaller needs.

Table comparing secured versus unsecured loans
Factor	Secured	Unsecured
Requires collateral	Yes	No
Interest rate	Lower	Higher
Loan amount	Generally higher	Generally lower
Loan processing period	Slower	Faster
Builds credit history	Yes	Yes

The right choice for your business will likely depend on factors such as how quickly you need funding, how much you need to borrow and how comfortable you are using business assets as collateral. Learn more about business lending and loans.

When choosing between a secured and unsecured business loan, consider your assets, financing needs, credit profile and business history. Secured loans may be better for larger, long-term investments, while unsecured loans can provide faster, more flexible access to funds for businesses with strong credit.

Pursue the right business loan for your company

With the right considerations in place, you can pursue the right type of business loan for your company's current needs. While a lender will decide if you qualify for a secured or unsecured loan, it can be helpful to know your preference when you apply.

Because a business's needs are always changing, a secured loan might be a great choice for today, while an unsecured loan might be a better fit next time. See all your business lending options and get your next round of financing started today at our Business Lending and Loans resource.

Secured vs. Unsecured Loan FAQs

It's typically easier to qualify for a secured loan because you will be providing collateral, making a lender more likely to approve financing for applicants with a lower credit rating or a minimal business credit history.
You may be eligible to get an unsecured loan if your business has good cash flow and a high credit score. Lenders may also require you to have operated your business for two years and have a certain amount of revenue to qualify.
Yes, you may be able to use personal assets as collateral for a business loan. However, you will want to weigh the risks involved in putting up your home, personal vehicle or other holdings as collateral.
The amount of interest you pay on an unsecured loan varies by lender and depends on the rate. You can use this calculator to compare loan terms and rates.
Depending on the lender, you may check the balance on your business loan by logging on to your online account, contacting the lender by phone or reviewing loan statements.
If you default on a secured business loan, the business assets you pledged as collateral may be seized by the lender to repay the loan.
If you default on an unsecured business loan, you may be referred to a collection agency or be sued by your lender for payment. This could result in your wages being garnished, a lien on your bank accounts and/or personal assets being seized if you guarantee the loan personally.