Glossary - Collateral
Collateral refers to assets or properties pledged by a borrower to secure a loan or other forms of credit from a lender. In the event of a default by the borrower, the lender has the right to seize the collateral and sell it to recover the amount owed.
Also known as
- Security Interest
- Pledge
Use cases examples
- Loan Agreement: In this agreement, the borrower pledges their commercial property as collateral to secure the loan for expanding their business operations.
- Mortgage: The homebuyer is required to use the purchased home as collateral, providing the lender the right to foreclose if the mortgage is not paid as agreed.
Considerations for investors
- Investors should evaluate the quality and value of the collateral to determine the security of their investment, especially in debt financing situations.
- Consider the potential for the pledged collateral to depreciate in value, which may affect the recoverability of the loaned amount in the event of default.
Considerations for founders
- Founders should assess the risk of pledging significant assets as collateral, which may impact the company's flexibility and future financing options.
- Understand the terms and conditions related to the collateral, including any covenants or restrictions that may affect the business operations or assets.
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