What is Collateral?
The Short Answer
Collateral explained simply
Collateral is something valuable that a borrower promises to a lender. It acts as a safety net for the lender. If the borrower can’t pay back the loan, the lender can take the collateral to get their money back. This makes lenders more willing to lend money, especially for larger amounts or to borrowers with less-than-perfect credit. Common types of collateral include real estate, vehicles, equipment, or even accounts receivable.
Real-World Example
The Small Business Loan
Imagine a small business owner needs a loan to buy new machinery. The bank asks for collateral. The owner offers their commercial property as collateral. If the business can’t repay the loan, the bank can take ownership of the property to cover the outstanding debt.
Why this matters
Collateral is important because it helps you get loans. It reduces the risk for lenders, making them more likely to approve your application. For business owners, using collateral can mean the difference between getting the funding you need to grow and being stuck.
When using collateral, understand its value and how it impacts your loan terms. Don’t over-collateralize, meaning don’t offer more assets than necessary. This protects your personal and business assets.
When using collateral, understand its value and how it impacts your loan terms. Don’t over-collateralize, meaning don’t offer more assets than necessary. This protects your personal and business assets.
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