The difference between a secured and an unsecured loan is what backs your promise to repay if payments stop. With a secured loan, the lender can claim a specific asset. With an unsecured loan, there’s no named asset, though there’s usually a personal guarantee and often a lien on the business as a whole.
Knowing exactly what you’re pledging lets you compare offers on more than price. It also tells you what you’ll still have free to borrow against when the next opportunity comes along.
What makes a loan secured
A secured loan is tied to collateral: an asset the lender can take and sell if the loan isn’t repaid. Common collateral includes:
- Equipment and vehicles
- Commercial real estate
- Inventory
- Unpaid invoices
- Cash in a savings or deposit account
Some financing comes with its own collateral. With equipment financing, the machine you’re buying secures the deal, so the purchase can often be financed without pledging anything else.
Because the lender has something to fall back on, secured loans tend to come with larger amounts, longer terms and lower costs. What you give up is time and flexibility. An asset may need an appraisal, and while the loan is open you usually can’t sell the collateral or borrow against it elsewhere without the lender’s agreement.
What unsecured means in practice
An unsecured loan isn’t tied to a specific asset. The decision rests on your cash flow, revenue, time in business and credit, so unsecured financing can move faster and usually needs less paperwork. It tends to cost more and run for a shorter term, and the amounts are usually smaller.
Most unsecured lenders still protect themselves in two ways: a personal guarantee from the owners, and a lien on the business as a whole.
How a lien works
A lien is a lender’s legal claim on property. For business assets, the lender records it by filing a public notice with the state, usually called a UCC filing. Anyone who searches your business’s name can see it, including the next lender you apply to.
Liens come in two main forms. A specific lien covers named assets, such as the excavator you financed or the building you bought. A blanket lien covers everything the business owns: equipment, inventory, receivables and deposit accounts. Many unsecured lenders file a blanket lien, and cash advance agreements often include one too.
A blanket lien matters most when you want more financing. Say a landscaping company signs a term loan with a blanket lien, and a year later wants to finance two new trucks. The equipment lender wants the first claim on those trucks, so the first lender has to agree to carve them out. That’s usually workable, though it adds time, and it’s easier to plan for before you sign the first loan.
When a loan is paid off, the lender should file a termination that clears the lien from the public record. Ask for it, and check that it was filed. An old lien that was never cleared can slow down your next application.
Personal guarantees and what they mean for you
A personal guarantee makes you personally responsible for the debt if the business doesn’t pay. Most business lenders ask for one, often from every owner above a certain share of the company. It’s common on secured loans as well as unsecured ones.
An unlimited guarantee covers the full balance plus collection costs. A limited guarantee caps your share at a set dollar amount or a percentage of the debt. If there are several owners, ask whether each one guarantees the whole balance or only a part of it.
A guarantee is different from pledging collateral. It doesn’t tie up a particular asset, but if the business defaults, the lender can come to you for what’s owed.
Cash advances are written differently. With working capital structured as a cash advance, the business sells a share of its future sales instead of borrowing, and the owner usually signs a guarantee as well. What that guarantee covers varies from one agreement to the next, so read it as closely as you would on a loan.
How the two compare
A secured loan usually means:
- A named asset backs it, and that asset is at stake if payments stop
- Larger amounts and longer terms are possible
- The cost is often lower
- Setup can take longer when the asset needs valuing
An unsecured loan usually means:
- A personal guarantee in place of a named asset, and often a blanket lien
- Smaller amounts and shorter terms
- A higher cost
- A decision that can come faster, based mostly on your bank statements and credit
Which one fits
Secured financing tends to fit when you’re buying something that holds its value, when the amount is large or the term long, or when cost matters more than speed. Unsecured financing tends to fit when timing matters, when you’d rather keep your assets free for other financing, or when the need is short-term and revenue is strong.
Plenty of owners use both. A contractor might finance an excavator with the machine as collateral and keep an unsecured line of credit for payroll between draws, so the machine backs only the debt that bought it.
Read these lines before you sign
- The collateral section. Does it name specific assets, or all business assets?
- The guarantee. Who signs, and is it limited or unlimited?
- The default terms. What counts as a default besides a missed payment?
- The limits on new financing. Can you take on more while this is open?
- The release. How and when is the lien cleared once you’ve paid in full?
Choose what backs your financing
If you’re buying equipment, start with equipment financing, where the machine is the collateral. If you’d rather keep your assets clear, see financing without collateral. To compare every option, browse all financing. Wherever you land, apply from that page. Applying takes a few minutes and won’t affect your credit score. We’ll review your application and match you with the options that fit.
