Let’s examine the next of the 5 C’s of credit – Collateral.

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.