Collateral: Not the most important C of Credit

When it comes to underwriting, collateral is often viewed as the safety net. It’s the backup plan—the asset that can be liquidated if a borrower defaults. In the traditional sense, collateral is a key part of securing a loan, especially for asset-backed lenders who place a lot of value on it. But it’s not always the star player in every credit decision.

In my experience, particularly with smaller transactions, unsecured loans have proven just as effective—sometimes even preferable. These loans, typically relying on a borrower’s cash flow, don’t require collateral to secure the loan. But that doesn’t mean collateral is irrelevant. For asset-backed lenders, it still offers a layer of security that reduces overall risk.

What’s important to remember, though, is that collateral, while valuable, isn’t a cure-all. It doesn’t mean you can throw caution to the wind when evaluating the other C's of credit. Take character, for instance. A borrower with strong character can weather tough times, even when collateral is less than ideal. Collateral might provide comfort, but a solid track record and a trustworthy relationship are just as crucial. If we place too much emphasis on collateral and ignore character, we might overlook a borrower’s true ability to repay.

So, yes, collateral is an essential element of a credit decision—especially for larger or riskier transactions—but it shouldn’t be the only thing that matters. A balance across

credit will always lead to the most informed, and often the most successful, lending decisions.