Access to capital is one of the most important tools available to businesses that want to grow. But the form that capital takes, and the trade-offs behind it, matter just as much as the amount. Secured business loans are a common way companies finance expansion, equipment, and everyday operations—with the global secured lending market valued at $12.4 trillion USD in 2023. These loans are straightforward in concept: businesses offer a valuable asset as collateral to secure funding. The details behind secured loans—such as what counts as collateral, how it shapes loan terms, and what risks it carries—can be harder to decipher.

Below, we’ll cover secured loans: how they work, how they differ from unsecured credit, what businesses can use as collateral, and the advantages and limitations businesses should consider.

What’s in this article?

• What is a secured business loan?
  
• How do secured business loans differ from unsecured loans?
  
• What types of collateral can businesses use to secure a loan?
  
• How does collateral reduce risk for lenders?
  
• What are the advantages of secured business loans for businesses?
  
• What are the risks and limitations of secured borrowing?
  
• How Stripe Capital can help
  

What is a secured business loan?

A secured business loan is financing backed by collateral (i.e., something valuable you pledge in exchange for capital for your business). If you can’t repay the loan, the lender has the legal right to claim and sell that asset to cover what’s owed.

Collateral can be real estate, equipment, vehicles, inventory, accounts receivable, etc. The purpose of collateral is that the lender has a tangible fallback if you don’t repay.

Here’s what that looks like in practice:

• A retail business borrows against its inventory. If the business fails to repay, the lender can take and resell the stock.

• A trucking company finances new rigs, with the trucks designated as collateral.

• A business with steady customer invoices uses those receivables as collateral, giving the lender direct access to incoming cash if the business can’t repay the loan.

Banks and traditional lenders often expect collateral when working with small businesses. It reduces their exposure and can make it easier for businesses to qualify—even if their credit isn’t flawless. Because the risk to the lender is lower, secured loans usually come with better terms, such as larger borrowing limits, lower interest rates, or longer repayment periods.

How do secured business loans differ from unsecured loans?

The biggest difference between a secured loan and an unsecured loan is collateral. Secured loans are backed by an asset, and unsecured loans are not. This difference reshapes who qualifies, how much they can borrow, and how much it costs.

Here’s a closer look at how these two types of loans differ.

Risk and recovery

With an unsecured loan, the lender’s only fallback is your legal obligation to repay. Some lenders require a personal guarantee, which makes the business owner personally liable.

With a secured loan, the lender can seize and sell your collateral if you default. Because secured loans give lenders a safety net, they’re considered lower risk.

Approval criteria

Unsecured loans demand stronger credit and financials since the lender doesn’t have an asset to rely on.

Secured loans are often easier to get, even if your credit isn’t perfect, because the collateral reduces the lender’s exposure.

Borrowing amounts

Unsecured loans typically have lower borrowing caps, since lenders don’t want to take on unlimited unsecured risk.

With secured loans, how much you can borrow is tied to the value of your collateral. If you put up more valuable assets, you can qualify for larger loans.

Rates and terms

Unsecured loans often carry higher interest and shorter repayment terms.

Secured business loan rates are usually lower, and repayment terms are typically longer, since the collateral lowers the lender’s risk.

Speed and process

Unsecured loans can be faster to process, since there’s no collateral to document.

Secured loans can take longer to close, since lenders might need to appraise collateral.

A secured loan trades assets for better terms: lower interest rates, higher borrowing limits, and longer repayment terms. An unsecured loan trades speed and flexibility for a higher cost and stricter credit requirements. The right choice depends on what collateral you have to pledge and how quickly your business needs capital.

What types of collateral can businesses use to secure a loan?

Collateral is any asset with clear value that a lender can claim if you default on the loan. Generally, the more valuable and more liquid the collateral, the more money you can borrow.

Here are the most common categories.

Real estate

Commercial property is a reliable form of collateral. It’s valuable, relatively stable, and has an established resale market.

Equipment and machinery

If you’re financing manufacturing equipment or specialized tools, lenders might take the equipment itself as security. Value depends on age, condition, and resale demand. Because equipment depreciates, lenders often discount its appraised value when calculating how much to lend.

Inventory

Product stock can back a loan, especially for wholesalers or retailers. The downside is that inventory can spoil, lose relevance, or sit unsold. Lenders typically lend against only a percentage of its value and might require insurance or regular reporting.

Accounts receivable

Unpaid customer invoices are an asset, and lenders accept them as collateral. If you don’t repay, the lender has the right to collect on those invoices directly. Receivables are more attractive to lenders if they’re relatively recent and from reliable customers.

Cash and investments

Cash in a business savings account or marketable securities (e.g., stocks, bonds) are strong forms of collateral. Retirement accounts, however, are typically off-limits.

Vehicles

Company cars, delivery vans, or trucks can secure a loan—much like equipment. Their value and condition determine how much you can borrow against them.

Personal assets

Personal assets can also be used as collateral. This means the business owner’s personal wealth, such as their house or savings, is available to the lender if the business doesn’t repay the loan.

Not all collateral is treated equally. Lenders prefer assets that hold value and can be sold quickly, such as property or cash. Niche equipment or slow-moving inventory might secure less favorable terms. Be ready to document ownership, value, and insurance for whatever collateral you pledge.

How does collateral reduce risk for lenders?

If a borrower defaults on a loan, the lender can repossess the collateral and sell it to recover what’s owed. Collateral provides a direct path to recovery that’s easier than chasing repayment through collections or lawsuits on an unsecured loan.

Collateral can also change borrower behavior. When a borrower pledges valuable assets, they have more to lose if things go wrong. When both sides have something at stake, it can give lenders more confidence that borrowers will repay.

Lenders protect themselves further by lending less than the full value of the asset, to leave a cushion in case the collateral’s value drops. Loans collateralized by commercial properties tend to be 75% or more of the property’s value, while inventory is often no higher than 50%.

Collateral decreases risk by serving as insurance against default and as an incentive system that encourages borrowers to follow through.

What are the advantages of secured business loans for businesses?

Secured loans are safer for lenders, and they can be highly valuable for businesses, too. They’re cost-effective, flexible, and often more attainable than unsecured credit.

Here are some tangible business benefits associated with secured loans.

Lower cost of borrowing

Collateral reduces risk for lenders, which usually translates into better pricing for borrowers. Secured business loan rates are usually lower than unsecured options.

Access to more capital

Because loan size is tied to collateral value, businesses can access larger amounts by pledging high-value assets. That makes secured loans practical for bigger moves, such as buying property, funding expansion, or acquiring equipment.

Easier approval

For newer companies or those with imperfect credit, collateral can make the difference between approval and denial. Lenders weigh the value of the pledged asset alongside credit history, which gives more businesses a path to financing.

Longer repayment windows

The security of collateral often makes lenders more comfortable stretching repayment over years instead of months. Spreading out payments can smooth cash flow and reduce strain on operating budgets.

Putting existing assets to use

Assets you already own—such as real estate, equipment, or vehicles—can be put to work to fund growth. Instead of sitting idle, they can become a tool for accessing capital without taking on investors or giving up equity.

What are the risks and limitations of secured borrowing?

Secured loans give you access to capital, but the trade-offs are serious.

• Collateral at risk: If you default, you could lose property, vehicles, or equipment that are key to running your business.

• Reduced flexibility: Assets pledged as collateral are tied up until the loan is repaid, which limits your ability to sell or use them elsewhere.

• Administrative overhead: Appraisals and insurance requirements mean more paperwork and ongoing monitoring.

• Borrowing limits: The loan size is capped by the value of assets you can pledge. Businesses with very few assets might find their options limited.

• Personal liability: Some lenders also require a personal guarantee, which puts your own wealth on the line if business assets don’t cover the debt.

Secured borrowing can be a powerful tool for businesses, but the risks can be significant. Before pledging assets, weigh the benefits of affordable capital against the real possibility of losing your collateral.

How Stripe Capital can help

Stripe Capital offers revenue-based financing solutions to help your business access the funds it needs to grow.

Stripe Capital can help you:

• Access growth capital faster: Get approved for a loan or merchant cash advance in minutes—without the lengthy application process and collateral requirements of traditional bank loans.
  
• Align financing with your revenue: Stripe Capital’s revenue-based structure means you pay a fixed percentage of your daily sales, so payments scale with your business performance. If the amount that you pay through sales doesn’t meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.
  
• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion, and more—without diluting your equity or personal assets.
  
• Use Stripe’s expertise: Stripe Capital provides custom financing solutions informed by Stripe’s deep expertise and payments data.
  

Learn more about how Stripe Capital can fuel your business growth, or get started today.