Collateral

Collateral is assets pledged by a company to secure a loan. In the situation of a mortgage loan, the house would be the collateral for the loan. This gives the bank some security in case the borrower is unable to make payments on the loan. In this case, the bank would be able to sell the house to get some or all of the money back that they had loaned out.

Promissory notes play a large role in the pledging of assets to a bank or other funding source. A collateral note is a promissory note secured by the pledge of specific company assets. Basically, when a business signs a promissory note while receiving funding, they are promising to pay back the loan on a certain timetable earlier agreed upon. To guarantee this note, they use company assets as collateral. The pledging of assets gives the bank some security if, for some reason, the borrower is unable to make payments. In this case, the bank is able to seize and/or sell the pledged assets to gain back some or all of the money they lent out.

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