# Collateral

> Collateral is an asset a business pledges to a lender to secure a loan. If the borrower can't repay, the lender can seize and sell the collateral to recover what it's owed.

## Key takeaways
- Collateral is an asset you pledge to secure a loan, and if you can't repay, the lender can seize and sell it to recover the balance.
- Because collateral lowers the lender's risk, secured loans often come with lower interest rates and larger amounts than unsecured loans.
- Lenders often lend less than an asset's full value, typically file a UCC lien to make their claim public, and a personal guarantee can still put your personal assets at risk.

## What collateral is

**Collateral** is something of value you pledge to a lender to back a loan. It
gives the lender a fallback: if your business can't make payments, the lender can
take the pledged asset and sell it to recover the unpaid balance. Loans backed by
collateral are called **secured loans**.

Because collateral lowers the lender's risk, secured loans often come with
**lower interest rates and larger amounts** than unsecured loans.

### What counts as collateral

The asset usually depends on the type of financing:

- **Equipment financing** is secured by the equipment being purchased.
- **Real estate loans** are secured by property.
- **Working capital loans** may be secured by **inventory** or **accounts
  receivable**.
- Some loans use a **blanket lien**, which covers a broad range of business assets
  rather than one specific item.

When a lender takes collateral, it typically files a **UCC lien** to make its
claim public and establish priority over other creditors.

### A simple example

If you borrow **$80,000** to buy a delivery truck through equipment financing, the
truck itself is the collateral. Pay as agreed and the lien is released when the
loan is paid off. Fall behind, and the lender can repossess the truck.

### What to watch for

- Lenders often lend **less than an asset's full value** (see advance rate), so
  pledged collateral may need to be worth more than the loan.
- A **personal guarantee** can put your personal assets at risk even on a
  business loan.
- Read how **default** is defined and what triggers the lender's right to seize
  collateral.

Hoss Capital can help you weigh secured and unsecured options so you understand
exactly what you'd be putting on the line.

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