Collateral is a tangible asset that a borrower offers a lender to secure a loan. The lender’s claim to a borrower’s collateral is called a lien.
If the borrower stops making loan payments, the lender can exercise the lien, seize the collateral and sell it. Equipment, buildings, real estate, accounts receivable and even can be used as collateral. Before making a loan, a loan originator evaluates the collateral a borrower is offering from several angles, including loan-to-value, liquidity and seniority, which we’ll explain below.