Definition
Collateral means an asset a borrower offers a lender to back a loan. If the loan is not repaid, the lender has the right to take that asset and sell it to recoup what it is owed. Australian lenders more often call it security, and the usual examples are property, vehicles, equipment, stock and money owed by customers. In general, the stronger the asset, the better the terms on offer.
Think of collateral as the lender’s fallback. If the repayments stop, it is the asset the lender can turn to.
What gets used
A home or commercial building, a ute or truck, an excavator, shelves of stock, a ledger of unpaid customer invoices: all of these can back a loan. Lenders value and handle each one differently. Real estate usually supports the biggest loans. A piece of machinery tends to secure finance for that same machine. Outstanding invoices are the basis of invoice finance.
What it changes
As a rule, stronger security lets a business borrow more, for longer and at a lower cost. When the asset is weaker, harder to sell or highly specialised, the lender may ask for a bigger deposit or offer tighter terms.
Read before you sign
Check precisely which assets the loan covers, how the lender records its interest, for instance on the PPSR or on a land title, and what has to happen for that interest to be released. Our guide to loan security and GSAs goes through it step by step. Want to see what your assets could support? Make one enquiry.
Common questions
Is collateral the same as security?
Yes, they mean the same thing. Collateral is the word you hear more in other countries, while Australian lenders tend to say security.
Does collateral guarantee approval?
No. Even with solid security, a lender still weighs up what the money is for, who is borrowing and how repayments will be made.
Sources and further reading