Every business owner needs a financial boost at some point to keep things going. And the good news is, money is there. Small businesses can secure loans to cover their operational needs and repay during the decided period. 

However, these loans come with some confusion. For example, one needs to know are small business loans secured or unsecured? Should they put up collateral? Will the interest rate bankrupt them? How fast can they get the cash? And so on. 

From these questions, we’ll answer the first one in detail and explain whether small business loans are secured or unsecured. Keep reading to make a confident choice for your future.

Are Small Business Loans Secured or Unsecured?

Before we answer ‘are small business loans secured or unsecured’, let’s understand what these terms mean:

  • Secured Loan: A loan where a borrower pledges an asset  to the lender is a secured loan. That pledged asset is called collateral, and if the borrower cannot repay the loan, it covers the lender’s loss. 
  • Unsecured Loan: If a loan is not backed by any collateral, it’s called unsecured. In this case, the lender relies on the borrower’s business revenue to check if they’ll be able to repay. 

Now, small business loans can be both secured or unsecured, depending on the financing you seek and the lender’s requirements. 

For example, a loan’s size, the business’s age, and revenue history determine collateral. Among these, loan size is the clearest indicator of a secured requirement. For reference, the US Small Business Administration (SBA), which sets industry standards for institutional loans, requires lenders to make all attempts to fully secure any loan over $350,000 with the business’s available assets. On the other hand, for loans of $50,000 or less, the SBA states that collateral is not required.

Put simply, businesses can get small loans without pledging collateral. But if they want more funding, they’ll have to provide a guarantee in the form of collateral. 

Secured Loans 

Since a secured loan requires you to pledge a specific business asset, the lender has a guarantee against the debt. In case your business defaults on the loan or you cannot repay for other reasons, the lender can seize and sell that collateral to recoup their losses.

Common examples of collateral include commercial real estate, heavy equipment (like machinery or vehicles), or high-value assets like accounts receivable. Here are some types of secured loans small businesses can access:

  • Equipment financing
  • SBA loans
  • Commercial real estate financing
  • Accounts receivable financing 
  • Fix and flip loans 
  • Asset-based loans 

All in all, secured loans are best for established businesses that have accumulated valuable assets and want the lowest possible cost of capital.

Here are the key benefits and risks of a secured loan:

  • Lower Interest: Putting up collateral reduces the risk for the lender. This translates directly into the best possible financial terms for the borrower, so you can experience lower interest rates. 
  • Higher Loan Amounts: The value of the asset can qualify you for larger loan amounts. Therefore, secured loans are ideal for major investments like property acquisition or equipment purchasing.
  • Longer Repayment Terms: Secured loans are amortized over much longer periods (sometimes 10–25 years). This means that you deal with much lower and more manageable monthly payments.

But this isn’t to say that secured loans are without risks. The most obvious risk with secured loans is the loss of the pledged asset upon default. Moreover, the collateral approval process requires formal appraisals, lengthy documentation, and valuation. All these rules make the funding timeline slower (often weeks or months) than for unsecured options.

Unsecured Financing 

The unsecured loan requires NO physical collateral. The lender bases the approval decision on your finances. It checks your business’s cash flow, revenue stability, and credit profile (in some instances).

Here are some unsecured loans for small businesses: 

  • Merchant cash advance (MCA)
  • Business line of credit
  • Term loans/working capital
  • Startup funding 

These loans are a lifeline for firms that haven’t yet accumulated the hard assets required for secured loans. Also, businesses with consistent revenue can get approved for unsecured loans even with a lower credit score. So if a business needs quick working capital without risking its assets, this option works well. 

The following few advantages of unsecured loans make them worth trying:

  • Fast Funding: Approvals for unsecured loans can happen in as little as 24 hours because there are no time-consuming asset appraisals or documentation.
  • Asset Protection: Since you don’t pledge collateral, your core business equipment and property are safe. Even if you miss a repayment, your assets won’t be at risk. 

But note that due to increased risk for the lender, these loans carry higher interest rates. Also, most unsecured loans require the owner’s personal guarantee, meaning the owner is liable for the debt if the business cannot repay.

Real World Case Studies on Secured Vs. Unsecured Loans

If you’re still unsure which category of small business loans suits you more, here are some examples to reduce the confusion: 

  1. Suppose a logistics company needs to buy a new fleet of trucks for $450,000. If this company is financially strong, it can use the new equipment as collateral for the loan. In turn, the lender may offer them the available interest rates and the longest repayment terms. That loan will effectively pay for itself over many years. 
  2. Now think of an e-commerce startup that requires $30,000 for inventory and marketing but has no business property or equipment to use as collateral. It’ll only qualify for an unsecured loan, and most banks would refuse its application. However, an alternative lender will look past the lack of assets and focus on the startup’s potential, such as their early bank deposits and cash flow stability. Eventually, the business will get a small funding approved without having to risk their personal home or savings account.
  3. In another scenario, think of a popular restaurant that needs $70,000 for expansion. This place has a complicated financial past, which has given it bad credit. For this business, the unsecured merchant cash advance (MCA) is the perfect solution. The lender doesn’t focus on the old credit score; they only see that the restaurant brings in consistent sales through card transactions. That’s why its MCA is approved, and the repayment is an automatic percentage taken from daily revenue. 

Conclusion 

From the low rates of long-term secured loans to the speed of unsecured working capital, the right financing choice depends entirely on your business’s goal and risk tolerance. So stop wasting time submitting paperwork to lenders who might reject you based on one outdated metric. 

ROK Financial makes the entire process simple: we instantly match your cash flow and business history to present the right solution. We don’t bind your loan approval to a credit score and help you secure funding on an urgent basis. Don’t let capital hold you back, call us and let’s sort out the money matters. 

FAQs

What is a Blanket Lien, and is it used in unsecured loans?

A blanket lien is a legal claim that gives the lender a legal right to claim nearly all of your business assets if you fail to repay the loan. 

Why do I need a Personal Guarantee if the loan is unsecured?

You need to give a personal guarantee to prove that you’re personally responsible for the debt if the business defaults. It assures the lender that the loan will be repaid.

Can I refinance a high-interest unsecured loan into a secured loan?

Yes, you can—it’s actually a smart move. If your business has acquired valuable assets or your credit has improved after you took a loan, you can use that equity to refinance the expensive unsecured debt into a new, lower-interest secured loan. It’ll significantly reduce your borrowing cost.