Find Out if a Small Business Loan is Secured or Unsecured (And Why it Makes a Big Difference)

Wondering if small business loans are secured or unsecured? Don’t worry, not all small business loans require collateral. In this article, we’ll tell you what the differences are between these two types of loans, and their pros and cons.

Then we’ll help you find the right financing option that maximizes funding and minimizes hassle for you.

Secured and Unsecured Small Business Loans: What’s the Difference?

Secured Loan: With a secured loan, approval is determined by the value of your collateral (also known as ‘security’). Think of collateral as a guarantee for your lender; in case you fail to pay the loan, the lender can take possession of your collateral.

Collateral can be physical assets such as property, vehicles, or business equipment; or it can be financial assets such as insurance policies and stock options.

There are several advantages to securing a loan amount, including:

• You may be able to get funding even if you have an imperfect credit score
• You may be able to borrow a larger amount than you would have been able without securing the loan
• Secured loans can have lower interest rates and longer repayment periods

Unsecured Loan: With an unsecured loan, approval is determined by your earnings and also your repayment or reimbursement potential. That’s why lenders may require you to have a higher credit score to qualify for an unsecured loan.

Unsecured loans tend to be for smaller amounts (whereas the average small business loan in the U.S. stands at around $633,000). They may also have a shorter repayment period.

Unsecured loans are a great option for small business owners who are looking for small or short-term funding and don’t want to go through the hassle of applying for a secured loan. Though you don’t need to provide collateral, you most likely will have to provide a personal guarantee in lieu of security.

So… Which Option is Best for Small Business Loans—Secured or Unsecured?

Which are better: secured or unsecured small business loans? The answer to this question depends on you, the borrower. There are advantages to both types of financing, depending on your personal assets and credit score. Let’s examine the pros and cons of each of the types of loans for small business owners.

Secured Loans

Pros:

• Larger loan amounts available: Thanks to the collateral attached to secured loans, it is possible to be approved for a much higher amount than an unsecured loan.
• Longer repayment terms: Secured loans enable borrowers to make repayments over a longer period of time. Many business owners find this aspect helpful to their long-term business plan.
• Lower interest rate: Loans that are secured tend to be lower risk for lenders, which means you may have to pay lower interest rates.

Cons:

• Requires collateral: Some business owners either do not have assets to offer as collateral, or they do not wish to put up their business assets as collateral. If you do not have real estate, financial assets, or any other form of collateral, you may face challenges getting approved for a secured loan.
• Application process time: Traditional banks may take weeks to approve a secured loan. This delay is not ideal for business owners that require financing fast. Alternative lenders, like Credibly, offer shorter application and process times.

Unsecured Loans

Pros:

• Application process: Unsecured loans may offer quicker approval in some circumstances. If you’re looking to skip the weeks-long approval process, an unsecured loan may offer a faster solution. (Though, when you work with Credibly, you’ll get funds in days no matter which funding option you choose.)
• No collateral required: Since unsecured loans do not require you to put up collateral, your assets are not at risk.

Cons:

• Lower loan amounts: As collateral is not provided, lenders may not approve loan amounts as high as with secured loans.
• Higher interest rate: Since unsecured loans are not spread out over a long period of time, the interest rates can be higher than secured loan rates.
• May be harder to get approved for: Approval for unsecured loans relies on credit history and credit score. Small businesses with a not-so-great credit rating may have to find an alternative financing option.

Ask the Experts if Your Small Business Loan is Secured or Unsecured

Financing can be complicated, but you don’t have to be confused. Credibly provides an accessible alternative to traditional bank financing. We enable small businesses to secure funding in just days, providing financing when you need it most.

Our customer service team is friendly, highly knowledgeable, and based entirely in the U.S. We are here to answer all your questions about the financing application process, loan options, and more.