Collateral
Last updated October 1, 2026
Collateral is property a borrower pledges to back up a loan. If the borrower fails to repay, the lender has the right to take the pledged property, sell it and apply the proceeds to the debt. A loan backed by collateral is called a secured loan. One without it is unsecured.
Business lenders accept many kinds of collateral:
- Real estate, such as an office building, warehouse or rental property, pledged through a mortgage or deed of trust.
- Equipment and vehicles.
- Accounts receivable and inventory, common in asset-based lending.
- Cash and deposit accounts, including reserve accounts held by the lender.
- Ownership interests, such as a pledge of the shares or limited liability company (LLC) interests in the borrowing company.
Lenders rarely lend the full value of the collateral. They apply an advance rate or a maximum loan-to-value (LTV) ratio to leave room for a drop in value and the cost of selling. For example, a lender that advances 75% against a hypothetical $1,000,000 property would lend up to $750,000.
Why it matters for lenders
Collateral is a backstop, not a substitute for repayment ability. A loan should be repaid from the borrower's cash flow. Collateral reduces the loss if that plan fails. Even so, a lender that cannot actually reach its collateral has, in effect, an unsecured loan.
Reaching it depends on paperwork. The lender needs a signed security agreement or mortgage and a public filing that puts others on notice. For most business assets in the US, that filing is a UCC-1 filing under the Uniform Commercial Code (UCC). For real estate, it is a recorded mortgage. Together they create the lender's lien. US bank examiners check that collateral documents are on file and that the collateral matches what the loan records describe.
Collateral also changes over time. Inventory is sold, equipment wears out and property values move. Lenders monitor insurance, re-check values and, for revolving loans, recalculate a borrowing base from current reports.
How it works in practice
A small business lender approves a loan secured by a manufacturer's equipment and receivables. Before closing, an analyst lists each asset, gets the equipment schedule and serial numbers, and runs a UCC search to confirm no other lender has a prior claim. The security agreement is signed, the UCC-1 is filed with the right state, and proof of insurance names the lender.
After closing, the loan record holds the collateral list, the filing number, the lapse date and insurance expiry dates. The system sends alerts before each one runs out.
When this information sits in folders and spreadsheets, insurance lapses and filings expire unnoticed. The lender may learn its claim is weak only when it needs it.
Related terms
Lien
A legal claim on property that secures payment of a debt. A lender with a lien can take and sell the property if the debt is not paid, and the lien stays attached until the debt is paid and the lien is released. Liens can come from an agreement, such as a mortgage, or from law, such as a tax or mechanic's lien.
UCC-1 Filing
A public notice, called a financing statement, that a lender files with a state office to record its claim on a borrower's business assets. Filing a UCC-1 is the usual way to perfect a security interest, which sets the lender's priority over later creditors. In most states a UCC-1 lasts five years unless the lender files a continuation.
Loan-to-Value (LTV)
Loan-to-value (LTV) compares a loan's size to the value of the property or asset securing it. It equals the loan amount divided by the collateral's value, shown as a percentage. A $750,000 loan on a $1,000,000 building is 75% LTV. The lower the LTV, the more the collateral can lose value before the lender is at risk.
Borrowing Base
A borrowing base is the amount a borrower can draw on a revolving credit line, set by the value of eligible collateral such as receivables and inventory. Each type of collateral is multiplied by an advance rate, reserves are subtracted, and the result caps how much the borrower can have outstanding. It is recalculated each time the borrower reports.
Personal Guarantee
A promise by an individual, usually a business owner, to repay a business loan from their own assets if the business cannot. It gives the lender a second source of repayment and ties the owner's own finances to the loan's success. Guarantees can be unlimited or capped, and they are standard in small business and many commercial real estate loans.
Further reading
See how lenders put this into practice
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