Collateral
An asset pledged as security for a loan.
Collateral is an asset a borrower pledges to a lender as security for a loan. If the borrower defaults, the lender can seize and sell the collateral to recover losses. Common forms include real estate, equipment, inventory, and accounts receivable. Secured loans (backed by collateral) typically offer lower interest rates than unsecured loans.
Example
A manufacturing company pledges its $200,000 CNC machine as collateral to secure a $150,000 equipment loan at a 6% interest rate, compared to 12% unsecured.
Why It Matters for Your Business
Offering collateral can dramatically reduce borrowing costs, but you risk losing critical assets if you can't repay, so borrow conservatively.
Related Terms
More Banking Terms
ACH
Automated Clearing House - an electronic network for financial transactions.
APR
Annual Percentage Rate - the yearly cost of borrowing including fees.
APY
Annual Percentage Yield - the real rate of return on savings including compound interest.
Bank Reconciliation
Matching bank statements with internal records to identify discrepancies.
Business Checking
A bank account designed for business transactions.
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