When you’re seeking funding for your business, one of the first decisions you’ll need to make is whether to pursue a secured or unsecured business loan. Understanding the difference between these two financing options is crucial. Each comes with distinct requirements, advantages, and risks—and choosing the right one can make a significant impact on your company’s financial future.
In this guide, we’ll break down how secured and unsecured loans work, the pros and cons of each, and how to decide which is best for your business.
A secured business loan is backed by collateral—an asset the lender can claim if you default on the loan. Common forms of collateral include:
Business equipment
Real estate
Inventory
Accounts receivable
This type of loan reduces the lender’s risk, which often translates to lower interest rates, higher borrowing limits, and longer repayment terms.
Lower interest rates due to reduced lender risk
Larger loan amounts are typically available
Longer repayment terms help with cash flow
Easier approval for businesses with limited credit history
Risk of losing assets if you default
More paperwork and longer application processes
Collateral valuation may delay funding
An unsecured business loan does not require collateral. Instead, lenders rely on your business’s credit profile, cash flow, and financial history to assess risk.
This makes them a quicker, but potentially more expensive option.
Faster approvals and funding
No risk to personal or business assets
Ideal for smaller, short-term needs
Higher interest rates due to increased lender risk
Lower borrowing limits than secured options
Stricter credit requirements
Shorter repayment periods
| Feature | Secured Loan | Unsecured Loan |
|---|---|---|
| Collateral Required | Yes | No |
| Interest Rate | Lower | Higher |
| Loan Amounts | Typically Higher | Typically Lower |
| Risk to Borrower | Risk of losing collateral | No direct asset risk |
| Approval Time | Slower | Faster |
| Repayment Terms | Longer | Shorter |
A secured loan may be the better choice if:
You need a large loan amount
You have valuable assets to use as collateral
Your business has a short or poor credit history
You're seeking lower interest rates and longer repayment terms
This type of loan is often suited for equipment financing, real estate purchases, or major expansions.
Unsecured loans are ideal if:
You need fast access to capital
You don’t want to risk losing assets
You have strong credit and consistent cash flow
You're looking for smaller, short-term financing
These are commonly used for working capital, payroll, or marketing campaigns.
What's the difference between secured and unsecured business loans?
Secured loans require collateral and offer lower rates and higher amounts. Unsecured loans don’t require collateral but have higher rates and stricter credit requirements.
What is your current credit score?
Do you have valuable assets to pledge?
How quickly do you need funding?
Can your business afford higher interest payments?
What’s the intended use of the loan?
Secured Loan Example: A manufacturing business wants to purchase $200,000 in new machinery. It uses existing equipment as collateral to secure favorable loan terms.
Unsecured Loan Example: A digital marketing agency needs $25,000 to launch a campaign. It opts for an unsecured term loan based on its strong cash flow and credit history.
If you’re unsure about either loan type, consider alternatives such as:
Business lines of credit – flexible and may be secured or unsecured
Invoice financing – advances based on unpaid invoices
Merchant cash advances – based on future sales
The right choice between secured and unsecured business loans depends on your financial situation, asset base, and borrowing goals. If you're looking for lower interest rates and don’t mind pledging assets, secured loans are a strong option. If speed and asset protection are your priorities, unsecured loans offer valuable flexibility.
Carefully weigh the pros and cons, and don’t hesitate to consult with a lender or financial advisor before moving forward.
Ready to explore your loan options?
Contact one of our loan advisors to find the right fit for your needs today.