This post was originally published on On Deck
When you need extra working capital, choosing the right type of small business loan or business line of credit is crucial. Business financing generally falls into two main categories: secured and unsecured. Each has its benefits and drawbacks, and the right choice depends on factors like your business’s financial health, business plan, credit history and the level of risk you are willing to take.
Let’s explore the differences between secured and unsecured business loans, and how to determine which funding option is best for your business.
What’s the difference between a secured and unsecured business loan?
A secured business loan requires the borrower to provide collateral — an asset that the lender can seize if the loan is not repaid. Common types of collateral include real estate, equipment, inventory or accounts receivable. Because these loans are backed by assets, they generally come with lower interest rates and higher borrowing limits.
An unsecured business loan, on the other hand, does not require collateral. Instead, lenders approve these loans based on the borrower’s creditworthiness and revenue history. Since unsecured loans increase the lender’s risk, they often come with higher interest rates and stricter qualification requirements.
What is collateral?
Collateral is an asset
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