Yarrow Blog

Business Loan Secured or Unsecured?

Young female entrepreneur looking at phone and smiling due to successful small business loan application

When you’re applying for a business loan, it’s crucial to know the difference between secured and unsecured loans and lines of credit. Below, we go over whether small business loans are secured or unsecured, and how to choose the right loan terms for your business.

Is a Small Business Loan Secured or Unsecured Debt?

The simple answer is this: small business loans can be either secured or unsecured. It all depends on various factors, such as the loan terms, your credit score, and the specific lender’s requirements. So, when you’re looking for a line of credit, you can apply for either secured or unsecured loans.

How do you choose the right type of loan for your business, though? Let’s consider the differences between secured and unsecured business loans so you can make an informed decision.

What Is a Secured Business Loan?

A secured business loan is a line of credit backed with collateral. The collateral used to secure the loan is typically business assets, such as:

  • Business equipment
  • Commercial property
  • Inventory

If you keep up repayments, your secured assets are safe. If you default on the loan, the lender can take the collateral, or the assets secured against the loan, and sell them to recover its own losses. 

What Is an Unsecured Business Loan?

With an unsecured business loan, a lender agrees to lend you a sum of money without security. So, if you miss loan repayments, the lender can’t take your business property to cover the debt.

That being said, lenders may need you to provide a personal guarantee before they’ll offer you an unsecured loan. The guarantee means you could become personally liable for the debt if you stop making repayments. In other words, you’ll be expected to repay the debt from your own pocket, or personal assets, rather than from business assets.

Businessman in glasses smiling and signing a business loan document at a table with two other businessmen

Secured Business Loans: Pros and Cons

As with all lines of credit, secured business loans have pros and cons.

The Pros

  • Lower interest rates: Since secured loans are lower risk for lenders, they may offer lower interest rates.
  • Larger sums of money: Lenders may be willing to offer more credit because it’s secured with your business assets.
  • Easier to get: If you have a low credit score or you don’t have much credit history, secured loans can be easier to obtain.

The Cons

  • Collateral: You may need a certain amount of collateral to put down upfront as security.
  • Loss of collateral: There’s always the chance you could lose valuable business assets if you default on the loan.
  • Longer repayment period: Secured loans may come with longer repayment periods, which means you’re in debt for longer.

Unsecured Business Loans: Pros and Cons

Unsecured loans also have their advantages and disadvantages.

The Pros

  • No collateral: There’s no need to risk business assets to get an unsecured loan.
  • Shorter loan terms: You may get shorter loan terms with unsecured loans.
  • Quicker to complete: Since there are no assets to evaluate, funding completes quicker than with secured loans.

The Cons

  • Higher interest rates: Some unsecured loans come with higher interest rates due to the lender’s risks.
  • Lower borrowing limits: As the lender takes on more risk, loan amounts may be lower than with secured loans.
  • Personal guarantee: If you need to provide a personal guarantee, you could face significant personal losses if you default on the loan.

What Is the Best Type of Loan for Small Business Owners?

Clearly, there are significant differences between secured and unsecured business loans. Which is right for you, though? Here are some factors to consider.

  • If you want lower interest rates, you might consider a secured loan. 
  • Although a longer loan duration means you’re in debt for longer, repayments could be more manageable, so a secured loan could be right for you.
  • If you’re looking for the quickest funding and a short loan term, unsecured loans could be an option.
  • You might not need to make a personal guarantee for an unsecured loan – it depends on the lender.

Think about what you need from your loan – and what’s affordable to you – before applying for credit.

Get a Business Loan Fast

At Yarrow Financial, we know how important it is for you to grow your business. That’s why we make the process of securing business credit quick and easy. 

No matter your credit score, we’re committed to helping you find a business loan to suit your needs. If you’re approved, it only takes a few hours to get final confirmation, and you should have the funds within 48 hours. 

By choosing Yarrow Financial, you can spend less time searching for a loan and more time focusing on your company. Looking to get a fast business loan? Visit our website and check your rate today!

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