Contract Glossary
Collateral
Definition
An asset pledged by a borrower to secure a loan or obligation. If you don't pay, the lender can seize the collateral. Your house secures your mortgage; your car secures your auto loan. Same principle in business contracts.
In Practice
A small business owner puts up equipment worth $50,000 as collateral for a $40,000 business loan. If the business defaults, the lender can seize and sell that equipment to recover their money. Collateral reduces the lender's risk, which usually means better terms for you — lower interest rates, higher loan amounts, or both.
Common in these contract types
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Frequently asked questions about collateral
Almost any asset with value: real estate, equipment, vehicles, inventory, accounts receivable, intellectual property, and even cash deposits. The key is that the collateral needs to be something the lender can actually seize and sell. A patent might work as collateral; goodwill generally won't.
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Create your contractThis content is for informational purposes only and does not constitute legal advice. For contracts with significant financial or legal implications, review by a qualified attorney is recommended.