What Are the Differences Between an Unsecured Loan and an SBA Loan?

Learn about the differences between unsecured loans and SBA loans for small businesses. Find out which type of financing is best for your needs.

What Are the Differences Between an Unsecured Loan and an SBA Loan?

The biggest difference between an unsecured loan and an SBA loan is the repayment time. SBA loans offer low interest rates, allowing the borrower to repay the amount over several years. However, since unsecured loans don't have any collateral requirements, they may be a good option for those who can't afford a down payment on a traditional loan. Small business loans can be secured or unsecured, but not both. Many of the loan options most recommended by small business finance experts are insured.

Other funding avenues that more small business owners might qualify for are often unsecured. The differences between these two types of loans, and what lenders usually do to account for these differences, may explain why. An unsecured small business loan is a loan that does not require collateral, but is based solely on the creditworthiness of the small business borrower. In the past, this type of funding was available to very creditworthy business borrowers. However, many small businesses may struggle to obtain unsecured loans for small businesses today.

The most common form of unsecured business finance that small business owners would encounter today is a business line of credit or a business credit card. The right small business loan will depend on your unique financial needs and how well you meet lender business lending requirements. If you're a new business or don't have perfect credit, offering collateral can make it easier to qualify for some types of small business loans. Depending on the state in which your company is located and other attributes of your company and the loan, your business loan may be issued by a member of the OnDeck family of companies or by Celtic Bank, an industrial bank authorized by Utah and a member of the FDIC. It's important to note that while some lines of credit require collateral, there are also line of credit products available that aren't fully secured (i.e., unsecured).

As with unsecured personal loans, unsecured business loans don't require borrowers to secure the loan with collateral. Of course, if your unsecured loan requires a general lien or personal statement, it's riskier than a secured loan. Unlike an SBA loan, ROBS is not debt financing, so there are no payments or interest to pay to a lender. In other words, the possibility of obtaining collateral (assets that a lender can seize if you don't repay your loan) can be worrying. The ability to combine the SBA with other funding options, such as ROBS or portfolio loans, for the down payment makes it one of the most flexible financing options available to small business owners. With all the information on the challenging aspects of SBA loans, it's easy to feel like it's more work than it's worth.

However, because they are backed by the Small Business Administration, SBA loans are generally cheaper than traditional loans. As a borrower, you'll be asked to put your most valuable assets, usually your home, as security for the loan. With unsecured business loans, as with many other things, you can get funding quickly, cheaply, or easily, but not all three. We'll look at these terms below, but they basically mean that if you don't repay your loan, a lender has the legal right to seize and sell assets to get your money back. Small Business Administration (SBA) loans and even other products such as credit cards and checking accounts through TD Bank are available beyond that requirement. Individual lenders will use the same security policy they use for non-SBA loans.