Secured vs. Unsecured Business Loans: Which One is Right for You?

When it comes to getting a business loan, you have two big choices: secured or unsecured.

Both options have serious implications. In this quick guide, we will cover the basics of secured and unsecured business loans.

Secured Business Loans

A secured business loan is granted on the condition that the borrower provides collateralized assets if they fail to repay the balance. Lenders will accept several kinds of collateral.

If you want to take a loan to purchase a new vehicle or piece of equipment, the item you purchase is normally used as collateral. This is a sensible option that most lenders will agree to because it greatly reduces their risk. Of course, by putting up collateral, you are taking on a lot of risk for them.

Because you accept more risk when you take a secured business loan, you can expect to be compensated with:

• Better interest rates and terms than an unsecured alternative.
• An easier time being approved for a loan. 
• The ability to secure much higher loan balances, especially when the collateral theoretically covers the entire cost of the loan.

Not all secured business loans have the same standard collateral requirements. In general, you can expect to have to provide one of these types of collateral:

• Business real estate.
• Equipment or vehicles.
• Inventory.
• Stocks.
• Cash/savings.
• Accounts receivable.

Unsecured Business Loans: What You Need

Unsecured business loans are any kind of business loan that is not secured by collateral. The lender does not reduce their risk by asking that you collateralize business assets in case you cannot repay them. Instead, they rely on your creditworthiness and business financials to determine whether to give you the loan.

To qualify for an unsecured business loan, you normally need:

• A high business credit score.
• Proof of ability to repay.

Naturally, if lenders are going to consider giving your business an unsecured loan, they will want to make sure that:

• Your business credit history demonstrates responsibility with credit.
• Your business has the finances necessary to ensure timely repayments.

Secured vs Unsecured Business Loans

All lenders view unsecured loans as more risky and will look for ways to offset that risk.

In general, it is much easier to qualify for an unsecured business loan if you have good business credit. But regardless of your credit, you can expect higher interest rates if you aren’t putting up collateral.

Businesses can apply for all types of unsecured business loans. These can include lump-sum loans for real estate, equipment, or for maintaining cash flow.

Compared with secured loans, unsecured loans tend to be in smaller amounts. Secured business loans represent less risk for lenders, so they can go into the hundreds of thousands or even millions of dollars. Unsecured loans tend to be far smaller, not normally surpassing the high tens of thousands or low hundreds of thousands of dollars.

Let’s go over a few examples of the requirements for unsecured business loans.

Unsecured Business Loans in Norway

In Norway, the Finanstilsynet is responsible for regulating credit and loans, and the Inkassoloven regulates debt collection. If you want a business loan in Norway, be aware that there are less effective “caps” on interest rates than there would be for personal loans.

With unsecured business loans, you can expect to face something closer to the maximum business interest rate of 6.85%. If you’re poorly qualified for a business loan and/or are not careful, you can face an effective rate that is much higher.

Unsecured Business Loans in Denmark

Business loans in Denmark are similarly well-regulated, with many loans not requiring collateral. However, you can expect higher rates and total costs. It is also very common for business lenders to request personal guarantees for business loans, shifting much of the risk to business borrowers individually.

The Danish Companies Act regulates business financing and loans. Recent changes have made it easier for small businesses and startups to access loans.

Unsecured Business Loans in Estonia

Business loans in Estonia are regulated by the Finantsinspektsioon.

There are many institutions in Estonia that can offer unsecured business loans. However, you can expect loan balance caps to be much lower than those for unsecured loans. Unsecured “microloans” of up to €50,000 are widely available, including from banks and alternative lenders.

Unsecured Business Loans in Lithuania

The Central Bank of Lithuania (Lietuvos Bankas) oversees business loan regulations.

There are many unsecured business loans available from banks and alternative lenders in Lithuania. However, it is hard to get larger loans exceeding €50,000 without providing collateral, which can help you qualify for loans of €1,000,000 or more.

Secured or Unsecured Loans: Which is Better?

The choice ultimately falls on you.

While an unsecured loan may seem like the “safer” option, that might not always be the case. There are responsibilities that come attached to any business loan agreement. Also, in some situations, an unsecured loan will lead you to pay more for the same outcome.

Keep in mind the differences between the two in terms of qualifications, loan amounts, and costs. Then, look into the local lending landscape wherever you are trying to get a business loan. That way, you can make a more informed decision for your business.

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