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An asset or property that a borrower offers to the lender as security for the loan can be termed as collateral. In case, the borrower discontinues making the promised loan payments, the lender is allowed to seize the collateral to recover from his losses. Hence, loans secured by collaterals have lower interest rates than unsecured loans.

Types of Collateral:

When experiencing a financial crunch, or just expanding, companies can adhere to any of the common collateral arrangements:

  • Purchase Money Security Interest (PMSI): In this case, the value of the equipment purchased is the security against the borrowed amount.

  • Real Estate: Businesses offering real estate as security against the borrowed amount usually request long-term loans of significant amounts. The value of the property is evaluated on factors like the market, foreclosure value, and, insurance value.

  • Endorser: In this case, another person acts as a guarantor and signs the note that backs up the borrower’s promises. When the borrower is unable to pay, the endorser is expected to compensate.

  •  Warehouse Receipts: The borrower offers their warehouse commodities as security against the loan. Generally, it is readily marketed staple or standard merchandise and the loan is for a percentage of the cost of the merchandise.

  • Display Merchandise: Loans are borrowed against display merchandise like appliances, equipment, automobiles or furniture.

  • Inventory: The assets of a company that could be liquidated are offered as security.

  • Accounts Receivable: The bank counts on the enterprise’s customers to repay the loan.

Some other kinds of collaterals offered are savings accounts, certificates of deposit, stocks, bonds, and, life insurance.

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