Collateral can be simply defined as any asset a lender will accept as security for a loan agreement. When you offer something you or your business owns as collateral, the bank is more likely to give you a loan. If you default on a collateralized loan, the bank then has the right to seize that asset.
Financial institutions like offering collateral loans because it gives them a way to recoup their financial losses should you fail to repay the loan. This is beneficial to your business because you’re more likely to get a loan if you have acceptable collateral to put up. The drawback is that if you’re not confident in your ability to pay the loan back and you put up, say, your house as collateral, you may not have a place to live should you default on the loan.