Secured VS Unsecured Business Loans: Which Is Better For Your Business?

The main difference between secured and unsecured business loans comes down to collateral.

Secured loans are backed by business assets, while unsecured loans rely more on creditworthiness and often require a personal guarantee. In both cases, you may still be personally responsible for repayment if the business fails.

Understanding when each option makes sense can help you choose the right loan for your business.

What Is A Secured Loan?

A secured business loan is backed by collateral — an asset the lender can seize and sell if you default. Because the lender has a way to recover losses, secured loans are generally considered lower risk and often come with lower interest rates, larger loan amounts, and longer repayment terms than unsecured loans.

That tradeoff is risk: if you default, you can lose the assets used to secure the loan.

Secured loans are often a good fit for established businesses that have valuable assets but may not have strong credit yet.

How Secured Loans Work

With a secured loan, you pledge specific assets as collateral. If you repay the loan as agreed, nothing happens to those assets. If you default, the lender can claim them to recoup losses.

Because collateral reduces risk, lenders are often more flexible on pricing and loan size than they are with unsecured options.

Common Types Of Collateral

Lenders won’t accept just anything, but commonly used collateral includes:

• Equipment or machinery
• Real estate
• Inventory
• Vehicles
• Cash or funds in a business account
• Marketable securities

The collateral must hold sufficient value and be acceptable to the lender. Older or depreciated assets may not qualify.

Where To Get Secured Loans

Secured loans are commonly available through:

• Banks and credit unions
• SBA lenders
• Equipment financing companies
• Some online lenders

Be aware that some online lenders rely on blanket liens instead of specific collateral. While technically different from a secured loan, blanket liens can carry broader risk for borrowers.

What Is An Unsecured Loan?

An unsecured business loan isn’t backed by specific collateral. Instead, lenders rely on creditworthiness, cash flow, and often a personal guarantee to manage risk.

Because there’s no asset to seize if you default, unsecured loans typically come with higher interest rates, smaller loan amounts, and shorter repayment terms than secured loans. However, they can be easier to access for businesses that don’t have valuable assets to pledge.

How Unsecured Loans Work

Instead of evaluating collateral, lenders focus on:

• Credit history (business and/or personal)
• Cash flow and revenue consistency
• Time in business

Because recovery options are limited if you default, lenders price unsecured loans higher to offset risk. Strong credit and reliable cash flow are typically required for approval.

Limits & Personal Guarantees

Even though these loans are labeled “unsecured,” many lenders still require a personal guarantee. This means you may be personally responsible for repayment if the business can’t meet its obligations.

For sole proprietors and general partnerships, personal liability already exists. LLCs and corporations may gain some protection, but that protection is often reduced when a personal guarantee is involved.

Where To Get Unsecured Business Loans

Unsecured financing is commonly available through:

• Online short-term lenders
• Business lines of credit
• Business credit cards
• Personal loans used for business purposes
• Some nonprofit or community lenders

Secured Loans VS. Unsecured Loans: Key Differences

While both secured and unsecured business loans can provide access to capital, they differ significantly in cost, risk, and eligibility requirements. The right option depends on your business’s assets, credit profile, and operating history.

Is A Secured Or An Unsecured Loan Right For You?

The right choice comes down to risk, cost, and what your business can realistically support.

Even when a loan is advertised as unsecured, lenders often require a personal guarantee, which means your personal assets may still be at risk if the business defaults. Unsecured loans generally make the most sense for businesses with strong credit, a low DTI, solid cash flow, and limited assets to pledge.

Secured loans are typically a better fit when you have valuable collateral and want access to lower rates, larger loan amounts, or longer repayment terms — as long as you’re comfortable putting those assets at risk.

When A Secured Business Loan Makes Sense

• You have qualifying collateral to pledge
• You want lower borrowing costs or longer terms
• You understand the risk of losing pledged assets if you default

When An Unsecured Business Loan Makes Sense

• You don’t have assets that qualify as collateral
• Your credit and cash flow are strong
• You understand the implications of a personal guarantee

No matter which option you choose, compare lenders carefully and make sure the loan aligns with your business’s financial health and long-term goals.