Ask Joey ™ a Question

What is collateral?

Collateral is when the debtor offers something tangible to the creditor in the case that the debtor cannot repay the loan (i.e. default on the loan). In order for the creditor to actual seize the collateral, the collateral must have attachment.

There are a variety of types of collateral that can offered to the credit:

1) Cash secured loan: This is when the debtor offers up other bank accounts that the creditor can liquidate

2) Invoice collateral: This when companies use uncollected invoices (i.e. accounts receivable) as collateral. If the debtor defaults, the creditor is paid on outstanding invoices instead of the debtor.

3) Inventory: A company can use inventory to collateralize a loan. Basically, the credit would take ownership of the inventory and liquidate it.

4) Real estate: The debtor can offer up their personal residence/land to collateralize a loan.

5) Equipment: The debtor can offer up personal equipment such as a car or boat. Company’s can also offer up machinery and equipment.

You might also be interested in...

  • Which documents should be compared or reconciled by the company to ensure the company only pays for goods that were received and prevent overspending?

    One control that every company should have in place is called the “voucher package” or “3-way match”, which reconciles the purchase order, the receiving report and the invoice. The voucher package ensures that the company only receives and pays for goods that they actually ordered.

  • What duties should be segregated in the payroll cycle?

    The company should segregate human resources, payroll accounting, and the treasurer. Each role is responsible for the following: 1) Human resources – This can be performed by the human resources department hiring new employees and maintaining records of the employees hire date and salary information. 2) Payroll (accounting) – Supervision can be assured by proper […]

  • What departments should be segregated in the revenue cycle at a company?

    In order for proper segregation of duties to exist in a company’s revenue cycle, the company should segregate the sales department, the credit approval department, the shipping department, and the billing department.