Collateral
Factual definition
Collateral consists of assets subject to security rights supporting an obligation. Enforcement after default depends on valid rights, the documents and applicable enforcement or insolvency procedures.
Collateral at Hanil Widget Works
Fictional teaching case. Hanil Widget Works is an invented company used for this example.
The Hanil balance sheet illustrates asset categories, not a verified security package. Inventory or equipment may support security rights if the relevant requirements are met.
The balance sheet alone establishes neither what is pledged nor lien rank, enforceability or realizable collateral value; liabilities and equity are not collateral assets.
Scroll horizontally to read all columns.
| Assets | Liabilities and equity | ||
|---|---|---|---|
| Cash | 4.20m | Accounts payable | 6.10m |
| Accounts receivable | 7.90m | Accrued expenses | 1.70m |
| Inventory | 4.70m | Total current liabilities | 7.80m |
| Total current assets | 16.80m | Long-term debt | 10.00m |
| Property, plant and equipment | 2.30m | Other non-current liabilities | 0.70m |
| Land | 11.00m | Total liabilities | 18.50m |
| Deposits and other | 2.00m | Owners’ equity | 13.60m |
| Total assets | 32.10m | Total liabilities and equity | 32.10m |
Source: UCC 9-609: possession after default, subject to enforcement requirements.
Estimate the cash behind the security right
Hypothetical example, separate from Hanil. A borrower owes US$1.5m.
Assume a lender has valid first-ranking security over specified equipment and a lawful completed sale realizes US$1.2m. After US$200,000 of permitted sale and enforcement costs, US$1m is available for this lender, leaving US$500,000 of the debt unpaid.
Assume no other recoveries or competing priority claims.
A US$2m equipment book value would not change that cash result. Investigate ownership, existing liens, asset condition, removal costs and the market of potential buyers.
The debt balance, carrying value and net enforcement proceeds answer different questions.
Enforcement also requires a lawful route. UCC 9-609 distinguishes judicial possession from nonjudicial action without breach of the peace.
Applicable enacted law, insolvency restrictions and the actual security documents must be checked. Collateral improves a claim only to the extent that the rights and recoverable value support it.
Where Collateral fits
Explore this term in the glossary cloud →