TL;DR: A security interest is a lender's legal claim over a borrower's assets, the collateral, that backs a loan. If the borrower defaults, the lender can enforce against the secured assets. A loan with a security interest is secured; one without is unsecured.
A security interest gives a lender a legal claim over specified assets of the borrower, known as collateral. It is the lender's protection: if the borrower defaults, the lender can take or sell the collateral to recover what it is owed. The assets pledged can range from specific items, such as equipment or receivables, to a general security interest over substantially all of a company's assets.
A loan backed by a security interest is secured debt; one with no such claim is unsecured. Secured lenders rank ahead of unsecured creditors for the assets they hold a claim over, which is part of how priority in the capital stack is established.
Venture debt is commonly secured by a general security interest over the company's assets, but its underwriting logic is different from asset-based lending. The security is a protection in a downside scenario; the loan itself is sized and approved based on the company's revenue quality and growth trajectory, not the liquidation value of its assets. This matters for asset-light technology companies, whose value is in recurring revenue rather than tangible collateral. Flow Capital underwrites the business rather than collateral, and does not require personal guarantees.
What is the difference between secured and unsecured debt? Secured debt is backed by a security interest in collateral the lender can claim on default. Unsecured debt has no such claim, which makes it riskier for the lender.
Does venture debt require collateral? Facilities are often secured by a general security interest, but they are underwritten on revenue and growth rather than on the value of assets, unlike asset-based lending.
Related terms: Senior Debt · Asset-Based Lending · Default · Personal Guarantee
