Other collateral: Overview, definition, and example
What is other collateral?
Other collateral refers to assets or property that are offered as security for a loan or obligation, apart from the primary collateral. In a lending or financing agreement, collateral is typically used to secure repayment of a debt. "Other collateral" can include additional forms of security such as personal guarantees, equipment, inventory, intellectual property, or other valuable assets that can be seized in case of default. It provides the lender with extra assurance that the loan will be repaid.
Why is other collateral important?
Other collateral is important because it enhances the lender’s protection in the event that the primary collateral is insufficient to cover the debt. By offering additional forms of security, borrowers may be able to access more favorable loan terms or higher loan amounts. For businesses, offering other collateral can increase their chances of securing financing or credit. It also provides lenders with more options for recovering their funds if the borrower defaults.
Understanding other collateral through an example
For example, a company might secure a loan by offering its commercial real estate as the primary collateral. However, to increase the likelihood of securing the loan, the company may also offer inventory and accounts receivable as "other collateral." If the company defaults on the loan, the lender can use the real estate, inventory, and receivables to recover the owed amount.
Another example could involve a personal loan where the borrower offers their car as primary collateral. As "other collateral," the borrower might offer a valuable collection of artwork. This gives the lender more security should the borrower fail to repay the loan.
An example of an other collateral clause
Here’s how an other collateral clause might appear in a contract:
“In addition to the primary collateral provided, the Borrower agrees to offer [Insert Asset] as other collateral to secure the full repayment of this loan.”
Conclusion
Other collateral is an essential tool in securing loans or obligations, as it provides extra assurance to lenders and can help borrowers obtain better financing terms. By offering additional assets as security, borrowers can increase their chances of loan approval, while lenders are better protected if the borrower defaults. Whether in real estate, equipment, or other forms of assets, other collateral helps strengthen the overall security of financial agreements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.