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Lenders will often ask the same question before they say yes: what is backing this loan? The answer decides whether a loan is secured or unsecured. This guide explains both in plain words, what each one means for you, and how to choose.
What is a secured business loan?
A secured business loan is backed by something your business owns. If you cannot repay the loan, the lender has a legal right to take that item, as set out in your agreement.
The item you pledge is often called collateral. That is just a banking word for "something of value that backs the loan".
What can back a loan? Common examples include:
- Equipment, such as an oven, a press or a machine
- Vehicles, such as a work van or a truck
- Stock, which means the goods you hold to sell
- Invoices, which means money your customers owe you
- Property, such as a building or land
For example, equipment financing is usually secured by the equipment itself. The lender holds a claim on the machine until you finish paying for it.
What is an unsecured business loan?
An unsecured business loan is not backed by a specific item. The lender decides mainly by looking at your income, your history and your credit.
You do not hand over a claim on a machine, a truck or a building. That can make things simpler, especially if your business does not own much that can be pledged.
Because the lender takes on more risk, unsecured financing may cost more, or the amount may be smaller. That is not always true, but it is a common pattern. Lenders may also ask for a personal guarantee, which we explain below.
Secured vs. unsecured: a simple rule of thumb
Here it is in one line: with a secured loan, you put something behind the loan, and lenders may offer more room. With an unsecured loan, you do not, but lenders may ask for more in other ways.
A quick side-by-side
- What backs it: a secured loan is backed by an item you own; an unsecured loan is not backed by a specific item.
- What the lender relies on: a secured loan relies on the item and your repayment history; an unsecured loan relies on your income, credit and history.
- What may differ: secured loans may allow bigger amounts or longer timelines; unsecured loans may be simpler to set up but can cost more or be smaller.
- What is at risk if you cannot repay: with a secured loan, the item; with an unsecured loan, a lender can still pursue repayment, and any personal guarantee can come into play.
These are general patterns, not rules. Every lender and every business is different.
Why do lenders ask what backs a loan?
Lenders lend money they want to get back. When something backs the loan, the lender has a fallback if things go wrong. That makes the lender more comfortable, and it can open the door to more choices for you.
When nothing backs the loan, the lender has to lean more on you: your income, your history and your promise to repay. Neither way is better or worse in every case. The right choice depends on what your business owns, how much risk you are happy to take, and what the money is for.
What can you use as security?
If you are weighing a secured loan, think about what your business already has. Different types of financing look at different things:
- Equipment you are buying. See equipment financing for how this works.
- Money customers owe you. Some financing is based on your unpaid invoices. Read about invoice financing and factoring.
- Stock and other business assets. Asset-based financing is built around what the business owns.
Ask each lender what it will accept. The same item may count with one lender and not with another. If you would like help comparing, you can book a short call with our team at any time and see what could fit your business.
What might lenders still ask for on an unsecured loan?
Even when no item backs the loan, lenders usually want some comfort. Common asks include:
- A personal guarantee. This is your own promise to repay if the business cannot. It means your personal money or belongings could be at risk. Learn more in our guide to personal guarantees on business loans.
- Clear bank statements that show money coming in
- Time in business and a record of paying things back
- Your credit history, both business and personal
If your credit history is weaker, you still have choices. See our page on business loans for bad credit for what may be possible.
What happens if you cannot repay?
This is the question many owners are afraid to ask, so here is a calm, honest answer.
- On a secured loan, the lender may be able to take the item that backs the loan, following your agreement and the law.
- On an unsecured loan, you still owe the money. The lender can try to collect in other ways, and a personal guarantee may come into play.
The most useful advice is simple: talk to your lender early if you think a payment will be hard. Most lenders prefer to work something out. This is general information, not legal advice. If you are already struggling, a qualified professional can help.
How to choose: step by step
- List what your business owns. Equipment, vehicles, stock, invoices and property are all things lenders may care about.
- Decide what you are comfortable putting behind a loan. Be honest about what you could not afford to lose.
- Match the loan to the purchase. Buying a machine often points to a secured loan on that machine. A short cash gap with few assets may point to an unsecured option.
- Ask what the lender needs beyond the loan itself, including any personal guarantee.
- Compare the full cost of each offer, including fees and the time you will be paying.
- Get a second opinion. A broker can lay out several options in one place. See how it works.
Example only: A trucker wants to buy a second truck. The truck itself can back the loan, so a secured option such as equipment financing may be a natural fit. A café owner, on the other hand, needs a cushion for a slow winter and does not own much that could be pledged. An unsecured option may suit better, with the lender looking closely at sales and history. Your situation will be different.
Common mistakes to avoid
- Pledging more than you need to. Ask whether a smaller item, or just one item, would be enough.
- Forgetting about the personal guarantee. It can apply even when no item backs the loan.
- Choosing only because it is easier to get. Simple is good, but check what it costs.
- Not asking what happens if a payment is missed. Know the steps before you need them.
- Skipping the full cost. Compare fees and total time, not just a headline number.
- Waiting until you are desperate. You have more choice when you ask early.
Ready for the next step?
Choosing between secured and unsecured does not have to be a guess. Your options depend on what your business owns, how long you have been running and what you need the money for. You can see what could fit your business by booking a short call with our team. It is a short conversation. You can also read how asset-based financing works at lendflo, or browse our questions and answers first.
This post is general information to help you understand your options. It is not personal financial, legal or tax advice. Details, rates and rules can change, so check the latest information before you decide.
