Collateral is an asset a borrower pledges to a lender as security for a loan, which the lender can seize if the borrower defaults.
Collateral reduces a lender's risk by giving it a claim on specific assets if the loan is not repaid. Common business collateral includes equipment, inventory, receivables, real estate, or a general security agreement covering all assets. Secured lending typically carries lower interest than unsecured, because the lender's risk is lower.
For small businesses, lenders often require both collateral and a personal guarantee from the owner, meaning personal assets back the loan too. Understanding what you have pledged, and the priority of competing claims, matters greatly if the business runs into trouble.
A company borrows $150,000 secured by its equipment and a general security agreement. If it defaults, the lender can seize the pledged assets to recover the debt, which is why secured loans cost less than unsecured ones.
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