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Collateral
Also called security, secured property, pledged assets.
Property a lender can take and sell if the debt is not paid, identified in the security agreement and made effective against other creditors by filing or possession.
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What it means
Three steps make collateral real. A security agreement in which you grant the interest, attachment when value is given and you have rights in the property, and perfection, usually by filing a UCC-1 financing statement, sometimes by possession or by control over a deposit account. Perfection is what decides who wins against other creditors and against a bankruptcy trustee.
Types differ in how much they support. Receivables and marketable equipment convert reasonably well. Inventory converts poorly, at liquidation values far below cost. Leasehold improvements, custom fittings and goodwill support almost nothing. Real estate is the strongest, and is why SBA lenders take a lien on an owner's property when the business assets do not cover the loan; SBA policy requires lenders to take available collateral up to the loan amount and does not permit declining a loan solely for lack of full collateral coverage.
Cash advance funders take a security interest too. Since the product is framed as a purchase of receivables, the interest is often described as covering the purchased receivables, though all-assets filings are common.
Collateral does not cap your exposure. A secured lender that sells the collateral for less than the balance can pursue the shortfall as a deficiency, and the personal guarantee is what makes that collectable from the owner.
Where this one catches people
Owners assume pledging assets means the lender's recovery is limited to those assets. Unless the debt is expressly non-recourse, which is rare in small business lending, the collateral is additional security, not a ceiling. You can lose the equipment and still owe the difference, plus collection costs.
Where you will meet this term
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Collateral — common questions
What does collateral mean?
Property a lender can take and sell if the debt is not paid, identified in the security agreement and made effective against other creditors by filing or possession.
Where does collateral catch people out?
Owners assume pledging assets means the lender's recovery is limited to those assets. Unless the debt is expressly non-recourse, which is rare in small business lending, the collateral is additional security, not a ceiling. You can lose the equipment and still owe the difference, plus collection costs.
Is collateral the same as an interest rate?
Collateral is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does collateral apply to?
Merchant Cash Advance, Term Loan, Business Line of Credit, SBA Loan, Equipment Financing, Asset-Based Lending.
Is there a worked example of collateral?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside collateral?
Blanket lien, Cross-collateralization, Deficiency, Personal guarantee, Purchase-money security interest.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.