What is collateral?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Collateral is property or another asset that a borrower offers as security for a loan, such as a building, a vehicle, equipment or stock. If the loan is not repaid as agreed, the lender can take the collateral to recover what it is owed. A loan backed by collateral is called a secured loan.
Offering an asset as collateral does not move it out of the business's books. The business still owns the asset and still records it as its own; what changes is that the lender has a claim over it while the loan is outstanding. Because that claim affects what the business can do with the asset, it helps to note against each item in the asset register which loan, if any, it secures.
A loan made without pledged collateral is unsecured. The lender generally assesses the borrower's finances and track record, so it may ask for up-to-date financial reports. Unsecured does not mean the lender has no way to recover the debt; its recovery rights are a question for a legal adviser.
In Australia
business.gov.au's glossary sends collateral to its entry for security, which covers property or assets that pass to the lender when a loan is not paid back. It calls an asset that is currently pledged for a loan encumbered, and uses repossession for a lender claiming property or assets to settle a loan in default.
Its guide to business loans describes a secured loan as one backed by something of value, such as property or stock, that the lender may claim to recover its money if repayments are not made. It adds that a vehicle or equipment bought with a loan can often be the security for it, and that with an unsecured loan the lender generally relies on the business's financial health rather than its assets. Before applying, it suggests working out which assets you could offer as collateral, if you need to.
Worked example
| Asset | Cost (AUD) | Security for |
|---|---|---|
| Delivery van | 41,000.00 | Vehicle loan |
| Workshop lathe | 18,500.00 | Equipment loan |
| Office computers | 5,200.00 | None |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Removing an asset from the books because it has been offered as collateral, when the business still owns it.
- Keeping no note of which assets secure which loans, so it is unclear what a lender can claim.
- Selling or trading in an asset that secures a loan without first checking the loan agreement.
Related terms
Related service
Small business bookkeeping
Your books kept current, every month.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.