Small Business Resources is now the Center for Business Empowerment.
January 29, 2024 | 4 minute read
Answered by
Roderick Wilson
Small Business Lending Product Executive
Bank of America
A business loan can be a powerful tool for expanding your business or refinancing your debt in today’s fast-changing economy, and both secured and unsecured options can come in handy. Many small business owners, however, are not familiar with the difference between these types of business loans. Understanding what sets them apart can help you select the type that’s best for your business.
These are business loans backed by collateral, meaning an asset such as equipment, inventory or real estate owned by you or your business. The lender will place a lien on the collateral. Examples of secured loans include mortgages (which are secured by the actual property you are buying), construction loans (secured by the property where you are doing the construction), equipment and auto loans (secured by the car, truck or big machinery you might be buying) and a home equity line of credit (secured by the home).
Because you could lose property if you default, secured business loans are not without risk. However, in exchange for taking that risk, you will find secured loans may have lower interest rates than unsecured loans. Financing terms may also be better, meaning you might have more time to pay off the loan.
An unsecured business loan is not backed by collateral. Instead, it is based solely on how creditworthy you are, which rests on factors such as your personal and business credit history. Lenders tend to view unsecured loans as riskier than secured loans, so they usually require that borrowers have a satisfactory credit history and pay them back more quickly. Because the loan is not secured by a valuable asset, unsecured loans also may carry higher interest rates than secured loans. Uses for unsecured loans may include a one-time purchase of a large piece of equipment, expansion or updates to the location of your business.
Secured loans
Secured loans, including those secured by the Small Business Administration (SBA), typically range from $50,000 to $5 million. Many banks offer smaller secured loans as well. For more information, see “What is an SBA loan and how do I qualify?”
Unsecured loans
Amounts tend to be smaller than for secured loans. Many range from $10,000 to $50,000.
Secured loans
Interest rates tend to be lower than unsecured loans. Repayment periods tend to be longer, and they can be up to 25 years for SBA loans for real estate.
Unsecured loans
Interest rates tend to be higher than secured loans. Repayment periods may be shorter and are typically within five years.
Secured loans
Applications may take several weeks or, for larger loans, several months.
Unsecured loans
Unsecured loans may be available within a few days from approval, in part because the application process can be quicker.
Secured loans
These require collateral, such as a house or property. Borrowers typically must have a strong credit profile. You will need to submit documents such as income statements and business balance sheets for the past two to three years.
Unsecured loans
No collateral is required. Borrowers typically need to have a satisfactory credit profile, and those with strong credit will typically secure more attractive interest rates. Depending on the loan amount, you may need to provide documents such as tax returns or bank statements to show proof of income.
Secured loans
Yes.
Unsecured loans
Yes.
Both secured and unsecured business loans can help you grow your business. If you own equity in a valuable asset such as commercial real estate, you may find that secured loans give you access to lower interest rates and longer payment terms, making them more affordable and putting less pressure on you as you repay your lender every month. However, if you don’t want to put up collateral or don’t have the type of asset that can be used as collateral, an unsecured loan can be a valuable tool, allowing you to access the funds you need quickly.
Before you consider either type of loan, review the terms and interest rates carefully. Create a cash flow budget to determine your ability to make payments over time or ask your CPA for guidance. Then talk with a lender or banker to evaluate collateral for a secured loan. If you are not comfortable putting up collateral (or don’t have any), an unsecured loan could be best.
As a business owner, it is important to consider both the risks and rewards of any loan. Any type of financing has both advantages and disadvantages, so it is important to consider your unique situation and ability to pay back the loan when deciding on the option that’s best for you.
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