What is secured financing?

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2nd Nov 2009 by Tom Lindmark

Secured financing is one in which the lender has a right to certain collateral that the borrower pledges to support the loan. The borrower agrees that should he not repay the loan as agreed, the lender has a right to seize the collateral to satisfy the debt.

The best example that most of us are familiar with is a mortgage. It is secured financing because the lender has the right to foreclose on your house if you don't pay the mortgage on time. Another example is a car loan in which your car can be repossessed if you don't pay the loan.

Companies pledge all sorts of assets in order to get financing. They might pledge the company real estate, the accounts receivable, their machinery and equipment or anything else of value that can be relatively quickly liquidated.

The opposite of secured financing is obviously unsecured financing in which only the promise to pay by the borrower is taken. Credit cards are a good example of this type of lending. If you don't repay them, the lender can't seize your house or car in order to get his money back.

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