Collateral

Definition

Collateral is an asset — such as property, equipment, vehicles, stock or receivables — that a borrower offers to a lender as security against a loan. If the borrower fails to repay, the lender has a legal right to take the collateral and sell it to recover what it is owed. A loan backed by collateral is called a secured loan; one without it is unsecured.

In plain terms

Collateral is the lender's safety net. Because the lender can fall back on a specific asset if things go wrong, secured loans often come with larger limits or lower pricing. The trade-off is that you put a real asset on the line — and if you default, you can lose it.

Collateral is not the same as a personal guarantee. Collateral is a specific company asset pledged to the loan. A personal guarantee is a director promising to repay from their own money and home if the company can't. The two are often confused, but they put very different things at risk.

Why it matters to your business

Whether a facility is secured changes what's at stake. Secured borrowing can unlock bigger sums, but it ties up assets you might need elsewhere and adds legal steps. Unsecured borrowing is faster and leaves your assets free, but lenders price for the extra risk and may lend smaller amounts.

For many growing companies, the bigger concern isn't collateral at all — it's the personal guarantee. Credicorp lends to the limited company on an unsecured basis with no director personal guarantee, so directors aren't putting their family home behind the company's borrowing. Always check both whether a facility takes collateral and whether it asks for a guarantee.

Example

An engineering firm wants £150,000 to buy a CNC machine. One lender offers a secured loan using the machine itself as collateral — competitive pricing, but the asset is charged until the loan clears. Another offers an unsecured facility at a higher rate but with nothing pledged and no personal guarantee, leaving the directors free to use the machine as collateral elsewhere later. The right choice depends on how the firm values flexibility versus cost — and how comfortable the directors are pledging assets.