Updated on April 19th, 2023

Is Small Business Loan Secured or Unsecured?

Although a small business loan may be secured or unsecured, nearly always, the loan is secured. The bank loans are nearly always secured by the business’s accounts receivable, intangible assets, and tangible property, if any exists.

Brad Nakase, Attorney

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If a business owner is looking for an affordable loan option and is not in any great rush, then an SBA loan is a worthwhile option. However, if a business is struggling to keep its doors open, then it may be a better idea to pursue a traditional loan, which requires less paperwork and time. There are other alternatives as well, including equipment financing, business credit cards, microloans, and merchant cash advances. A small business owner should review their company’s financial needs and research which of these options best suits the business.

Secured Loan and Unsecured Loan Example

Emma is the owner of a small flower shop in Los Angeles, where she sells beautiful flower arrangements for birthdays, weddings, and holidays. Emma has recently decided to branch into edible arrangements, where she would sell flower-shaped fruit and chocolate creations. However, to expand her business in this way, she will require a loan to source the best chocolate from around the world, as well as hire more staff. While researching loans, Emma discovers that the Small Business Administration offers attractive options for small companies like her own. However, she notices that some loans are secured, while others are not. If possible, Emma would like to avoid providing collateral, because she would not like to lose her house or car in the event of default. So, she begins to research which SBA loans are secured, and which are not, so that she can pick the right option for her business.

Are Small Business Loans Secured or Unsecured?

Within the Small Business Association’s 7(a) program, every offered type of loan requires collateral to secure the loan, if the loan amount goes above certain thresholds. However, it is possible to get an unsecured SBA loan for smaller monetary amounts.

As an example, under the Standard 7(a) loan, lenders do not need to take collateral for loans going up to $25,000. However, for 7(a) loans that go above $350,000, collateral must be secured. That collateral needs to be worth as much as possible, up to the amount of the loan. For instance, a business owner might need to offer real estate or a boat to cover such a high loan amount.

The nature of an SBA loan – whether it is secured or unsecured – has major consequences for a business owner’s credit score and business finances. In general, secured loans are less expensive, but there is more of a risk for the borrower. By contrast, unsecured loans tend to be more expensive, but the business owner borrowing money faces less risk.

Whether an SBA loan needs to be secured or unsecured depends on the type of loan and its amount. This article will review these requirements to help a business owner understand which loan options are secured or unsecured.

What Are the Collateral Requirements for SBA Loans?

The Small Business Association’s primary program for small business financing is known as the 7(a) loan program. There are six different types of loan options within thus program, each of which comes with its own terms and conditions. The following sections will list each type of loan, as well as its collateral requirements. A business owner should pay close attention to a loan’s collateral rules and the terms of repayment before submitting an application.

  1. Standard 7(a) Loan

As discussed previously, a Standard 7(a) SBA loan does not need collateral, but the loan amount must be $25,000 or less. If the loan amount is any higher, then a Standard 7(a) loan will require collateral as security.

That said, if a business owner wishes to borrow funds in excess of $25,000 but less than $350,000, the individual lender will determine the required collateral for the loan. Essentially, this means that the SBA only has particular security requirements for 7(a) loans above $350,000. Beyond that rule, the specific lender may create their own requirements for collateral.

  1. 7(a) Small Loan

For 7(a) Small Loans up to $25,000, a lender is not required to ask for collateral. This is similar to the Standard 7(a) loan. However, for 7(a) small loans that go above $25,000, the lender is required to put a lien on the assets purchased with the loan money, as well as fixed assets.

It is important to remember that this is only the minimum collateral requirement. Individual lenders will also use the same collateral policy that they use for non-SBA loans.

  1. SBA Express Loan

When it comes to security requirements, an SBA Express Loan is similar to 7(a) Small Loans. Collateral is not required for Express loan amounts up to $25,000. However, for loan amounts that range between $25,000 and $350,000, lenders have to use the collateral policies they already have in place.

  1. Export Express Loan

The Export Express financing program offers simplified SBA funding to exporters. Lines of credit and loans are included within this program. The program has no specific collateral requirements. Rather, lenders who provide Export Express loans use the collateral policies they already use for non-SBA loans.

In essence, Export Express loans can be either secured or unsecured. In the end, it will depend on a particular lender’s policy.

  1. Export Working Capital Loan

Export Working Capital (EWCP) loans, as provided by the SBA, need to be secured. The Small Business Association mandates that any export-related inventory and receivables that are funded using the export Working Capital Loan are held as collateral. In addition, any individual who owns 20% or more of the business is required to personally guarantee the EWCP loan.

  1. International Trade Loan

An SBA International Trade loan is secured by a first lien on the equipment or property that is financed. A second option is to use a business’ other assets as collateral. On occasion, a second lien could be used if the SBA assesses that there is “adequate assurance of loan payment.”

A business owner may be required to offer further collateral or personal guarantees depending on the SBA’s assessment.

How Are SBA Loans Different Than Other Loans?

SBA loans are backed by the Small Business Administration. Therefore, these types of loans are overall less expensive than typical non-SBA loans. If a business is approved for an SBA loan, then the borrower will get an excellent and competitive rate.

The only difficulty is that SBA loans are not easy to get. Not only do they have limited availability, but there is also a lot of paperwork involved, as well as tough eligibility requirements.

For instance, to qualify for any of the above-listed loans, a business owner must first use any alternative funding available, which includes personal assets. The owner must also have “reasonable” owner equity that may be invested.

Non-SBA loans, by contrast, do not have such strict eligibility requirements. The process of receiving a loan is also much quicker. In some cases, depending on one’s financial situation, a business owner can get approved for a non-SBA loan in a couple of days. This is great news for a small business owner in need of immediate funding.

Though the SBA Express program is generally fast, SBA loans take between five to ten days to get approved. Often, the process takes longer because the loan must be approved by the lender and the Small Business Association.

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