finance
Collateral
Assets pledged to secure a loan - the lender's safety net if you default.
Definition
Collateral is an asset (equipment, real estate, receivables, personal assets) pledged to a lender as security for a loan. If you default, the lender can seize the collateral. Collateral reduces lender risk, which means lower interest rates and easier approval. Common collateral types: real estate (commercial property), equipment, accounts receivable (AR factoring uses AR as collateral), personal guarantees (business owner pledges personal assets). Personal guarantees are particularly common for small businesses - and particularly dangerous, because they expose personal wealth to business risk.
In your business
- →Personal guarantees expose personal wealth - try to negotiate them out or limit them as the business matures
- →Pledged collateral isn't 'free' - if the loan goes bad, you lose the asset
- →More collateral = lower rate, but only pledge what you can afford to lose