Secured vs. unsecured short-term business loan
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Key takeaways
- Secured short-term business loans require collateral, such as business assets or property, while unsecured loans do not
- Secured loans tend to have lower interest rates and higher loan amounts than unsecured loans, while unsecured loans tend to have faster funding speeds
- SBA loans can be secured or unsecured, depending on the amount borrowed and the type of loan
The difference between a secured loan and an unsecured short-term business loan is whether you have collateral backing the loan. Lenders look more favorably on secured loans in terms of interest rates and the maximum amount you can borrow because these loans pose less risk for them. Yet an unsecured loan means you won’t have to risk losing the business asset if you default — at least not immediately. In either case, the repayment terms will be short, often up to 24 months.
Let’s run through why you might choose a secured vs. unsecured short-term business loan.
What is a secured short-term business loan?
A secured short-term business loan is a loan with short repayment terms that is backed by business assets or personal property like cars or your home.
These assets are called collateral, and the lender can seize these if you fail to repay the loan. The assets used can include commercial real estate, equipment, investments or cash on hand — virtually anything with value that can be liquidated.
What is a business lien?
A business lien is a claim a lender makes against your business giving it the right to take possession of assets to fulfill the loan. The claim against business property stays in effect until the loan is repaid or settled through debt relief.
The lender typically files a Universal Commercial Code (UCC) lien, which shows the loan is backed by collateral. If the business names specific assets as collateral, the lender files a specific collateral lien.
This is important because other lenders can see which asset is used in order to avoid filing another lien against the same asset. If a lender chooses to file another lien, the initial filing will state which debt gets repaid first with the asset. Lenders may also file a blanket lien, which gives them a claim to the business as a whole.
What is an unsecured short-term business loan?
An unsecured short-term business loan is a loan with a short repayment period not backed by collateral. These loans work best if you don’t want to tie the loan to business assets. Average interest rates for unsecured business loans can vary based on factors like your loan type and your credit score. But for the best rates and repayment terms, you’ll need to be an established business with a solid credit like a score of 670 or higher.
Lenders often tighten requirements for most unsecured loans since they take on the risk of not getting repaid the full amount. To offset that risk, lenders may require a personal guarantee, which makes business owners personally responsible for repaying the loan. If you default, the lender can pursue your personal assets to satisfy your debt.
Not all unsecured business loans require good credit. Some lenders offer unsecured types of bad credit business loans. These may be high-risk unsecured term loans, business lines of credit or merchant cash advances. To offset the extra risk, lenders often charge high interest rates, such as 30 percent or more.
Which is better: secured vs. unsecured short-term business loan?
Whether a secured or unsecured short-term business loan is better depends on what you’re looking for, such as the lowest interest rates or best chance of approval.
Look at how different secured or unsecured short-term loans influence loan features.
Loan amounts
Lenders tend to offer higher loan amounts on secured loans over unsecured short-term business loans since they’re sure to get paid either by the borrower or the collateral. For example, PNC Bank offers unsecured business loans up to $100,000 but raises its maximum loan amount to $3 million for a short-term secured loan.
Interest rates
You’ll also see lower interest rates with secured loans versus unsecured loans, though the difference varies by the lender. Bank of America’s secured lines of credit start at as low as an 9.50 percent APR while its unsecured line starts at a 10.75 percent APR.
Online lenders trend toward higher starting rates like a 30.00 percent APR for either type of loan, and they may not disclose the difference between secured and unsecured loans.
If you choose a secured loan, lenders might charge an appraisal fee to value the asset you’re using to back the loan. This can set you back a couple of hundred dollars, though lower interest rates for the loan might offset the business loan fee.
Fast funding
Generally, the funding speed may not be different between secured and unsecured loans if you provide all the necessary documents to prove you can repay.
The catch is that secured loans are easier to prove your creditworthiness since assets back the loan. With an unsecured loan, there may be more back and forth if the lender asks for additional documentation.
Online lenders can provide funding for either loan in as little as 24 to 72 hours. Traditional banks may take from a few days to a few weeks to approve the loan.
Less risk
With both secured and unsecured short-term business loans, you risk the lender pursuing business assets for repayment if you default. But with a short-term secured loan, the lender is more likely to seize the business assets you used as collateral.
Many lenders also require you to sign a personal guarantee for either loan, which means they can seize personal assets to repay the debt. In this case, it’s less risky to sign a personal guarantee on a secured business loan since the lender will go after business collateral first.
Accessibility
You have to meet the lender’s minimum requirements for both secured and unsecured loans, such as its minimum credit score or time in business. But if you’re a startup business or have poor credit, you have a better chance of approval with a secured business loan. Putting up collateral gives the lender reason to believe you can repay the loan, despite the lack of a solid credit history.
Types of short-term loans
Once you think through the type of short-term loan you need, you can choose the best short-term business loan option for you. Compare the differences between the types of loans:
| Loan | Secured or unsecured | Details |
|---|---|---|
| Term loan | Both | Low starting interest rates from 8.00% Fixed repayment schedule Used for defined purpose |
| Lines of credit | Both | Borrow as needed Loan amounts typically lower than term loans May have draw fees when borrowing |
| Equipment loan | Secured | Equipment used as collateral Relatively easy to qualify for Terms usually up to 5 years |
| Invoice financing | Secured | Loan secured by unpaid invoices High fees Funding as soon as 24 hours |
| Invoice factoring | Secured | Factoring company collects unpaid invoices You get 70% to 90% of invoice amounts High fees |
| Business credit cards | Both | Relatively easy to qualify for Find 0% intro APRs Earn rewards APRs range from 18.00% to 35.00% |
The best business credit cards are unsecured, though you may have to sign a personal guarantee. Secured business credit cards require a cash deposit that acts as your credit limit. Both options can help you build business credit.
Do all types of SBA loans require collateral?
The U.S. Small Business Administration (SBA) provides loan guarantees through its participating lenders in an effort to assist small businesses in obtaining financing. Short-term SBA loans can have far more favorable interest rates compared to other types of loans.
Some SBA loans under $50,000 don’t require collateral, but it’s up to the lender to decide if you must provide assets. The collateral requirements for SBA 7(a) loans exceeding $50,000 are determined based on the lender’s standard policies for non-SBA loans of comparable size. The SBA also requires a personal guarantee from all SBA-insured loans from owners with a 20 percent or greater equity stake in the business.
Bottom line
When choosing between a secured or unsecured short-term business loan, consider your business’s creditworthiness and the specific funding needs you have. If you have poor credit, a secured short-term loan can help you get approved while keeping interest rates to a minimum. But if you’d rather not tie valuable assets to the loan, an unsecured loan might be the right choice for you.
Frequently asked questions
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