Collateral . . .

is any asset pledged as security for a loan. If a collateralized loan is not repaid as agreed, the creditor can foreclose upon the collateral to secure repayment. By reducing the lender's risk, collateral makes it easier for a company to borrow and to borrow at a favorable rate. In contrast to bank loans, which are often collateralized, most venture capital investments are made with little or no collateral.

Available collateral should not be ignored. When borrowing from traditional lenders, it can decrease the risk and thereby increase the principal amount lent to the company. It can also reduce the interest rate charged for the loan. By making borrowed funds available to a company, collateral can delay the need for expensive venture capital and the dilution of management's stock ownership that occurs when an equity investment is made. Also, collateral can be used to secure portions of a venture capital investment that is structured as debt and thereby make the capital easier to attract. See: Dilution (Percentage), Equity, Factoring, Inventory Financing, Nonrecourse Debt.