Is a Business Loan a Secured or Unsecured Loan?

Is a Business Loan a Secured or Unsecured Loan?
Taking on outside financing, whether it be through crowdfunding, investors, or a loan could be a crucial step in growing your business. If you’re considering a business loan, here are some differences between secured and unsecured loans.
by Deborah Findling Nov 14, 2022 — 2 min read
Is a Business Loan a Secured or Unsecured Loan?

This article is for educational purposes and does not constitute legal or tax advice. For specific advice applicable to your business, please contact a professional.

According to a recent Federal Reserve Small Business Credit Survey on Employer Firms, business owners applied for financial assistance based on a range of needs. The leading reason was to meet operating expenses. Expanding their business, pursuing new opportunities, and acquiring business assets ranked as the second reason for applying for financing, and the third was in order to refinance debt.

Taking on outside financing, whether it be through crowdfunding, investors, or a loan could be a crucial step in growing your business. When it comes to loans, they can come in many forms and serve a variety of purposes. If you’re considering a business loan, it may come in a secured or unsecured form.

The difference between business loans and personal loans

The main difference between a personal loan and a business loan is that personal loans are intended for personal purchases and business loans are intended for purchases related to the business. These business expenses could include equipment, inventory, business debt consolidation, and more.

Secured vs. unsecured business loans

Business loans can come in both secured and unsecured loan form. The differentiator between a loan that is secured versus unsecured is whether or not that loan is backed by collateral. Unsecured loans don’t require any form of collateral where secured loans do. Collateral in this case can be a house or car, for example. If the loan isn’t paid back, the lender could then seize that collateral as payment.

An unsecured business loan not backed by collateral may require a personal guarantee. Alternatively, this loan could be extended based on the business’s revenue. In both cases, the business owner’s ability to qualify for the loan is determined based on a number of factors that may include credit or business revenue. Typically unsecured loans carry a higher interest rate than a secured loan.

Examples of Secured loans

Below are examples of common types of secured loans:

Examples of unsecured loans

Below are examples of common types of unsecured loans:

Best practices before taking out a loan

There are many factors taken into account to determine whether your application for a business loan will be approved or rejected. These factors change from lender to lender. 

 

If you are a Square seller, Square Loans automatically extends an offer through the Loans tab of your Square Dashboard. Payment frequency, business health, and customer mix are among the factors that are used to determine eligibility

Deborah Findling
Deborah Findling is an Executive Managing Editor at Square. She also writes about investment, finance, accounting and other existing and emerging payment methods and technologies.

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