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Asset pledged as security to ensure payment or performance of an obligation. In bank lending, it is generally something of value owned by the borrower. If the borrower defaults, the asset pledged may be taken and sold by the lender to fulfill completion of the original contract. Four types of collateral, as recognized by the Uniform Commercial Code, are commonly used in secured lending: (1) trade goods, (2) paper (negotiable instruments and title documents), (3) intangibles, and (4) business proceeds (cash). Collateral assigned to the lender can even be the asset being financed, as in Asset-Based Lending where a loan might be secured by business inventory or accounts receivable. In a home mortgage loan, the borrower gives the lender a Mortgage on the house being purchased.

When bank assets are securitized, or converted into marketable securities in the Secondary Market the Principal and Interest payments serve as collateral for the securities offered for sale to investors.

See also Asset-Backed Securities; Collateral Loan; Security Agreement; Security Interest; Side Collateral.

Collateral is an item that is pledged to guarantee repayment of a loan. Collateral items are generally of significant value—property and equipment are often used as collateral, for example—but the range varies considerably, depending on the lending institution and variables in the borrower's situation. Collateral only comes into play when a company needs to make a secured loan. Unlike unsecured loans, in which a borrower is able to get a loan solely on the strength of its credit reputation, secured loans require borrowing companies to put up at least a portion of their assets as additional assurance that the loan will be repaid. Many start-up businesses turn to collateral-based loans to get their start.

TYPES OF COLLATERAL. Many different types of collateral arrangements can be made by companies, whether they are experiencing a financial crunch or making plans for expansion. Common types of collateral include the following:

Purchase Money Security Interest (PMSI). Also known as a chattel mortgage, this option allows the borrower to secure a loan by borrowing against the value of the equipment being purchased.

Real Estate. Businesses that utilize real estate—usually a personal residence—as collateral are generally requesting long-term loans of significant size (the company has plenty of other collateral options for smaller loans). The size of the loan under this arrangement is predicated in large measure on the market and foreclosure value of the property, as well as the amount of insurance coverage that the company has taken out on it.

Endorser. Under this form of collateral, a company secures a loan by convincing another person to sign a note that backs up the promises of the borrower. "This endorser is then liable for the note," stated Mark Van Note in ABCs of Borrowing. "If the borrower fails to pay, the bank expects the endorser to pay. Sometimes the endorser may also be asked to pledge assets." A guarantor loan security is similar to the endorser arrangement, except that the guarantor is not required to post collateral.

Warehouse Receipts. Another option for borrowers is to put up a portion of their warehouse commodities as collateral. Van Note explained that with warehouse receipts, "the receipt is usually delivered directly to the bank and shows that the merchandise has either been placed in a public warehouse or has been left on your premises under the control of one of your employees who is bonded. Such loans are generally made on staple or standard merchandise that can be readily marketed. The typical loan is for a percentage of the cost of the merchandise."

Display Merchandise. This method of borrowing, which is also sometimes referred to as "floor planning," is similar to warehouse inventory. Under this plan, display merchandise such as furniture, automobiles, boats, large appliances, and electronic equipment can be used as collateral to secure loans.

Inventory. This encompasses all the various assets (merchandise, property, equipment, etc.) owned by the borrowing business that could be liquidated to repay the loan.

Accounts receivable. "Many banks lend money against accounts receivable; in effect, counting on your customers to pay your loan," explained Van Note. "The bank may take accounts receivable on a notification or nonnotification plan. Under the notification plan, the purchaser of the goods is informed by the bank that the account has been assigned and is asked to make payments directly to the bank. Under the nonnotification plan, customers continue to pay you and you pay the bank." Under this collateral agreement, lenders sometimes advance up to 80 percent of the value of the receivables once the goods are shipped.

Savings accounts andc ertificates of deposit.

Stocks and bonds. Publicly held companies have the option of offering stocks and bonds within the company as security.

Life insurance. Some lenders are willing to accept the cash value of a life insurance policy as collateral on a loan.

Further Reading:

Brealey, Richard A., and Stewart C. Myers. Principles of Corporate Finance. McGraw-Hill, 1991.

Financing for the Small Business. Small Business Administration, n.a.

Jacksack, Susan M., ed. Start, Run and Grow a Successful Small Business. CCH, Inc., 1998.

Pickle, Hal B., and Royce L. Abrahamson. Small Business Management. John Wiley & Sons, 1990.

Van Note, Mark. ABCs of Borrowing. Small Business Administration, n.a.

adjective

1. Lying in the same plane and not intersecting: parallel. Idioms: side by side. See geometry.
2. Giving or able to give help or support: accessory, ancillary, assistant, auxiliary, contributory, subsidiary, supportive. See help/harm/harmless.
3. In a position of subordination: dependent, subject, subordinate, subservient. See over/under, part/whole.

Definition: indirect, secondary
Antonyms: chief, direct, main, primary, principal

Related; indirect; not bearing immediately upon an issue. The property pledged or given as a security interest, or a guarantee for payment of a debt, that will be taken or kept by the creditor in case of a default on the original debt.

That which is collateral is not of the essence. Collateral facts are facts that are not independently provable from, and that are not directly relevant to, issues in a cause of action. Collateral heirs are those individuals who are not directly related to the deceased through consanguinity. Similarly, collateral ancestors are uncles and aunts, as contrasted with direct ancestors, such as parents and grandparents.

Property or its equivalent that a debtor deposits with a creditor to guarantee repayment of a debt.

Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default.

Investopedia Says:
Collateral is a form of security to the lender in case the borrower fails to pay back the loan.

For example, if you get a mortgage, your collateral would be your house. In margin trading, the securities in your account act as collateral in the case of a margin call.

Related Links:
Use the 5 "W"s to finance your dreams without banking on a second signature. Getting A Loan Without Your Parents
What is the difference between asset-based lending and asset financing?
Find out what options are available when it comes to borrowing money. Different Needs, Different Loans
These may be a handy way to borrow money, but this convenience does not come without risk. Promissory Notes: Not Your Average IOU
Find out what your broker is doing with your securities when you invest on margin. Benefit From Borrowed Securities
Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky. Margin Trading

LearnThatWord.com is a free vocabulary and spelling program where you only pay for results!

• Kinship and Ancestry - collateral: kin descended by different line from same stock, such as uncle and nephew
• Customs, Formalities, and Practices - collateral: (adj) incidental or additional to matter being discussed
• Banking and Financial Services - collateral: assets pledged by borrower to guarantee repayment of loan
• Kinship, Marriage, and Other Customs - collateral: kin descended by different line from same stock
• Relative Positions - collateral: (adj) parallel or conforming in position or order; running side by side
• Order, Hierarchy, and Systems - collateral: (adj) corresponding, esp. in parallel sequence; secondary

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Common misspelling(s) of collateral

• colateral

Dansk (Danish)
n. - sikkerhed, slægtning i sidelinje
adj. - beslægtet i sidelinje, sideordnet, underordnet, side-

Nederlands (Dutch)
onderpand, bloedverwant (tweedegraads), collateraal, bijkomstig, tweedegraads verwant

Français (French)
n. - (Fin) nantissement, (Jur) collatéral
adj. - (Jur) collatéral, secondaire, (Mil) dégâts, (Fin) (prêt) nanti, (Méd) collatéral

Deutsch (German)
n. - Sicherheiten, Pfand, (Med.) nachgeordneter Teil
adj. - nebensächlich, kollateral, parallel, zusätzlich

Ελληνική (Greek)
n. - (οικον.) πρόσθετη ασφάλεια, πλάγιος συγγενής (από άλλο κλάδο της ίδιας οικογένειας

Italiano (Italian)
pegno, collaterale

Português (Portuguese)
n. - colateral (m)

Русский (Russian)
дополнительное обеспечение

Español (Spanish)
n. - garantía subsidiaria
adj. - colateral, paralelo, auxiliar, subordinado, accesorio, concomitante, correspondiente

Svenska (Swedish)
n. - släkting, realsäkerhet

中文（简体）(Chinese (Simplified))
旁系亲属, 担保品, 抵押品, 并行的, 旁系的, 附随的

中文（繁體）(Chinese (Traditional))
n. - 旁系親屬, 擔保品, 抵押品
adj. - 並行的, 旁系的, 附隨的

한국어 (Korean)
n. - 방계친, 부대사실, 담보물
adj. - 서로 나란한, 부수적인, 담보로 내 놓은

日本語 (Japanese)
adj. - 相並んだ, 対応する, 付帯的な, 傍系の, 見返りの
n. - 傍系親, 付帯事実

العربيه (Arabic)
‏(الاسم) ضمانه قرض‏

עברית (Hebrew)
n. - ‮משכון, עירבון‬
adj. - ‮צדדי, משני, מקביל‬

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