Collateral – 2nd form of repayment
Bankers also look at collateral as the secondary source of repayment.
- Collateral are assets offered by a company as an alternate repayment source.
- Typically these assets include real estate, accounts receivable, inventory, and equipment.
- In a liquidation scenario, accounts receivable can be used to pay down a loan, while equipment and real estate can be sold to generate income to pay down the loan as well.
- Until a business is established, a business owner will need to pledge collateral that may be linked to personal assets, such as a house.
- No one wants to be in the position of losing a home because a loan has not performed. A business owner needs to think carefully about how he or she will handle the collateral element when borrowing money from a financial institution.
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