When a lender asks what will “secure” a loan, they’re asking what they can recover if the loan isn’t repaid. The answer shapes your rate, how much you can borrow and how quickly you’re approved.
The difference
A secured loan is backed by something of value, such as equipment, property, receivables or inventory. If the loan isn’t repaid, the lender can take that asset. Because the risk is lower, rates are usually lower and limits higher.
An unsecured loan isn’t tied to a specific asset. The lender relies on your cash flow and credit. Rates are usually higher and amounts smaller.
| Secured | Unsecured | |
|---|---|---|
| Backed by | A specific business asset | Your cash flow and credit |
| Typical rate | Lower | Higher |
| Typical amount | Larger | Smaller |
| Approval | Depends on the asset and the business | Depends heavily on credit and history |
Personal guarantees
Many business loans, secured or not, also ask the owners for a personal guarantee. It means you’re personally responsible for the debt if the business can’t pay. For newer and smaller businesses, it’s often a condition of approval.
Before you sign, ask whether the guarantee can be limited to a fixed amount or a percentage of the loan, and whether it can be released once the business reaches certain milestones.
What can be used as security
Equipment and vehicles, commercial property, accounts receivable, inventory and, in some cases, a general security agreement over all business assets. Each lender values these differently. Receivables and real estate tend to carry the most weight.
