Collateral (5 C's of Credit)
What does it mean
In the 5 C’s of Credit, Collateral refers to the last resort source of repayment from a loan after the borrower’s income (Capacity) as well as working capital and net worth (Capital) have been exhausted. If a loans reaches this stage, the pledged collateral is sold and the proceeds are used to repay the loan.
Why does it matter
Collateral is a bank’s fail safe for preventing a loss on a loan that goes bad. Knowing the important role that collateral plays in the transaction, a banker should ensure that the collateral being taken meets the following criteria to be protect themselves from a loss:
- Readily marketable
- Clear lien position in the collateral
- Value of Collateral exceeds loan amount
- The value of the asset is independent of the operations of the borrower
Other Relevant Terms
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