Collateral, is a security against Loan in the form of property/assets. Financial institutions need collateral as mortgages and other secured loans, including repossession, foreclosure and non-recourse loans. In case, If the borrower stops making payments, then financial institution can take possession of the mortgaged property.
Collateral can be both tangible and intangible goods. Tangible properties include machinery and equipment, Real Estate, Art, Jewellery and annuities etc. whereas Intangible properties include payment rights, investment funding, Stock and Bonds fixed deposits etc.
The collateral can be less or more than and equal to the value of the loan.
Types of Collateral: There are various types of collateral and this depends upon the nature of the loan. The following are some of the types of collateral demanded and accepted by the commercial banks or financial institutions.
a. Plant and equipment: - It relates to the manufacturing of plant and machinery, generating set, Trucks and other heavy/light equipments. Such holdings are appropriate for term loans, working capital loans and other syndications. It is suggested to obtain the actual market value of these holdings.So that, amount of offered loan can be passed.
b. Natural resources: - Oil, gas and other natural resources can be considered as a collateral for the loans, especially tied with long term and project tied loans. In such case, the borrower should be the owner of these natural resources.
c. Real estate: - Land and building represent one of the most general type of collateral for mid term and long term loans. Houses,Residential/office buildings, warehouses, Shopping centers or factory Building falls under this category.
d. Marketable Securities: - Stocks,shares and Bonds can considered as collateral for short term loans. Such holdings can be cashed readily at any time. The amount of granted loan depends upon the market value of these securities with some margin to accumulate the market fluctuations.
e. Inventory: - Inventory as a collateral can be considered in five common ways as asset-based financing:
- Floating Lien
- Trust Receipts (floor planning)
- Chattel Mortgage
- Terminal Warehouse
- Field Warehouse Receipts