The choice between secured and unsecured small business loans depends primarily on whether you are looking to expand an existing company or start a new one. Unsecured small business loans are those that do not require the borrower to put up collateral as a security guarantee, so they are geared towards entrepreneurs who need to finance their start-up costs. Owners of existing businesses benefit from putting up their businesses’ equity as collateral through lower interest rates and fees.

Small business loans can be risky for financial institutions because if the business is not successful, the borrower might default on their loan. Lending companies make up for defaults by predicting the expected default rate and turning it into interest rates and fees. The higher your interest rate, the more likely lenders think you are to default on small business loans.

If you need to finance the expansion of an existing business through business loans, consider using your business’s equity as collateral for a secured loan. The equity guarantees the lender that even if you default on your loan payments, they will be able to collect on the equity so as not to lose money. This makes offering you secured small business loans relatively low-risk, and lower risk means lower interest rates and fees for you. You will be able to save substantially in the long run by putting your business’s equity to work for you. Nonetheless, do not forget that using your business as collateral means that you could potentially lose it if you do not keep up on payments.

Entrepreneurs who either lack existing equity or would rather not put up their business as collateral can obtain unsecured small business loans.

Unsecured loans differ from secured loans because the lender does not require collateral from the borrower. This type of loan is generally associated with higher interest rates because the lender is taking on more risk. However, since lending companies evaluate the terms of the loan (eligibility, interest rates, fees, etc) on the borrower’s credit history, those with excellent credit can still hope to obtain a relatively low-cost loan.

Shop around for the best rates and look for lenders who are affiliated with the US Small Business Administration (SBA). This government agency backs private financial institutions so that borrowers can pay the lowest rates possible.