Quick Answer: Small business loans are either secured or unsecured. The key difference is collateral. Secured loans require assets you pledge that lenders can seize if you can't repay. Unsecured loans skip the collateral but hit you with higher rates and personal guarantees. Your choice affects approval chances and what you're risking.
How Do Secured Small Business Loans Work?
Worried about high interest rates eating your profits? Secured loans might be your answer. These loans require collateral: valuable assets you pledge to guarantee repayment.
For restaurants managing hourly teams, this might include your commercial kitchen equipment, dining room furniture, or the building itself. Service businesses often use vehicles, specialized tools, or office equipment as collateral.
Here's the trade-off: lenders face less risk because they can seize and sell your collateral if you default. That means they offer lower interest rates and better approval chances.
Let's look at the numbers. According to the SBA 7(a) program, secured loans currently have maximum rates of prime + 3.0% to prime + 6.5%, depending on loan size. That's approximately 10.0% to 13.5% with the current prime rate at 7.0%. Compare that to unsecured rates: typically 8.50% to 16.75% according to FDIC lending data.
The downside? Miss payments and lenders can seize your pledged assets. That could mean losing essential kitchen equipment or real estate.
But secured loans offer real advantages: approval rates reach 75% at small banks for secured lending. Unsecured options have much lower approval rates.
What Makes an Unsecured Loan Different?
If you need funding quickly and don’t want to pledge equipment or other assets, unsecured loans may be a better fit.
They're appealing to service businesses with limited physical assets. Your consulting firm, cleaning service, or salon can potentially access working capital without pledging equipment.
But note this: “unsecured" doesn't mean "no personal risk." Most lenders still require personal guarantees. That means you're personally liable if your business can't repay.
Here's what makes unsecured loans tougher to get:
- Stronger credit scores: Because unsecured loans don’t have collateral, lenders want to see a stronger credit profile and steady revenue before approving them.
- Interest rates run higher: Lenders lack collateral to protect themselves. According to FDIC lending data, unsecured business credit lines range from 8.75% to 16.75%. Secured options start around 7.50%.
The upside? Speed matters when opportunity knocks. Unsecured loans can be approved and funded in 2-10 business days. Secured loans typically take weeks due to collateral appraisal and valuation requirements.
Which Type of Loan is Right for Your Business?
Finding the right type of loan starts with knowing how your business operates today and what you need funding to accomplish. Your choice depends on five key factors:
- Available collateral you can pledge.
- Your creditworthiness and business history.
- Business age and annual revenue.
- Loan amount needed.
- How quickly do you need funding?
Choose secured loans in these situations:
- Equipment purchases: That oven replacement serves as its own collateral.
- Restaurant renovations: Real estate upgrades qualify for favorable long-term rates.
- Large amounts: $100,000+ loans come with better terms when secured.
- Lower rates matter: According to the SBA 7(a) program, secured loans feature rates from prime + 3.0% to prime + 6.5%. That makes them more cost-effective than unsecured alternatives.
- Go unsecured in these situations:
- Quick working capital: You need funds in days, not weeks.
- Limited physical assets: Service businesses without substantial equipment.
- Avoid pledging equipment: You can't risk losing critical business assets.
- Hiring surges: Your hourly teams need expansion during busy seasons.
- Marketing campaigns: Short-term capital for growth initiatives.
- Seasonal gaps: Bridge financing when revenue dips temporarily.
According to the SBA, unsecured lines provide faster approval, between 2 and 10 business days, compared to secured options. They typically carry higher interest rates and require stronger credit profiles.
How Does Homebase Help You Plan for the Right Type of Financing?
Understanding whether a secured or unsecured loan fits your business starts with clear financial data. Homebase gives you real-time insight into labor costs and staffing patterns through tools like labor cost reports, timesheets, and consolidated business data. With accurate visibility into expenses and trends, it becomes easier to evaluate what your business can comfortably support.
Homebase also helps you anticipate future staffing needs with resources like our guide to forecasting models. More predictable operations and reliable cost tracking make comparing financing options more straightforward.
Get Homebase free for six months.
Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article reflects accurate guidance for small business owners. We start with primary information from federal agencies, verify details using official lending programs and financial regulations, and use reputable industry resources only to supplement—not replace—official guidance.
For this piece, we referenced official materials from the U.S. Small Business Administration (SBA), Federal Reserve, and FDIC lending data, and publicly available guidance from regulated financial institutions on secured and unsecured loan requirements.