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Collateral surety is a commercial paper that is issued as a guarantee or pledge of collateral in exchange for the issuance of a loan. Any number of assets may be pledged as collateral for the loan, subject to the approval of the lender. Often, a company will choose to pledge assets that are valuable, but are not essential to the core operation of the business.
The point of the declaration of collateral surety is to provide the lender with the assurance that even in the event of unanticipated reversals, the borrower will still be able to honor the debt. By providing a specific listing of the assets that will serve as collateral for the loan, the receiver also demonstrates intent to honor the debt regardless of future circumstances.
For the duration of the loan period, any assets that are included in the collateral surety will not be sold or altered in any fashion, without the express permission of the lender. In the event that the value of one or more of the assets listed as collateral lose value during the course of the loan, both the lender and the borrower may choose to amend the terms and conditions on the collateral surety, but this is a very rare occurrence. Generally, this will only take place if the borrower is having trouble making the scheduled payments on the loan balance.
For the borrower, the use of collateral surety can make it possible to obtain a loan when the current financial condition does not allow the corporation to command a line of credit or receive a signature loan. While the loan may be considered somewhat more risky and will carry a higher rate of interest than other business loans, the use of collateral surety does tend to keep the finance charges somewhat lower than other high risk loan arrangements.