- 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.
Frequently asked
What can be used as collateral for a business loan? +
Common examples include equipment, vehicles, real estate, inventory, and accounts receivable. Some loans are secured by a specific asset; others use a blanket lien over general business assets.
What happens to collateral if you default? +
If you can't repay, the lender can take possession of the pledged asset and sell it to recover the outstanding balance. This is the main risk of a secured loan.
Do all business loans require collateral? +
No. Secured loans require collateral, while unsecured loans don't. Unsecured loans often carry higher rates and may still require a personal guarantee.
Last updated: June 2026