What is security (collateral)?

Security turns an abstract credit exposure into a concrete way to recover the money. The borrower signs a security agreement, mortgage deed or debenture that identifies the asset and sets out the lender's powers, such as appointing a receiver or selling the asset. If repayments stop, the lender can enforce those rights instead of standing in line with unsecured creditors.

Security is different from a guarantee, which is a third party's promise to pay, and from covenants, which are promises about how the borrower will behave or perform. A guarantee gives the lender another debtor; security gives it a direct claim over property. The two often sit together in the same facility.

A registered mortgage over land is the classic form, with priority decided under the land titles system. Over company assets, a fixed charge attaches to specific, identifiable items such as a building or plant, while a floating charge hovers over a changing pool such as inventory and crystallises on default. Fixed charges usually rank ahead of floating charges in an insolvency.

Security interests over personal property, including vehicles, equipment, intellectual property and receivables, are registered and perfected on the Personal Property Securities Register. Possessory security such as a pledge or lien relies on the lender holding the asset, and debentures often bundle fixed and floating charges for company borrowing. In equipment finance the chattel mortgage is the everyday example: the lender's interest in a ute or excavator is registered on the PPSR.

Security also has to be perfected. Land mortgages are lodged with the land titles office, personal property interests go on the PPSR, and some interests are perfected by possession or control. Priority then generally follows the order of registration, subject to exceptions such as purchase money security interests and statutory priorities. Registering early is cheap and often decisive; an unperfected interest can be pushed behind later creditors or a liquidator.

When a borrower defaults, the lender confirms the default event, serves the notices the documents and statute require, and checks its registrations are current before enforcing. Remedies include exercising a power of sale, taking possession of pledged assets, or appointing a receiver to sell or manage the assets. Missed notices or a sale at undervalue can delay recovery or expose the lender to claims, so lenders take legal advice before enforcing.

Lenders value security using comparable sales for property or equipment, discounted cash flows for income-producing assets, or replacement cost less depreciation for specialised plant, and express the exposure as a loan-to-value ratio. Monitoring continues through the life of the facility: scheduled revaluations, trigger-based revaluations after a covenant breach or major disposal, evidence of insurance with the lender's interest noted, and serial numbers, tags or telemetry for mobile assets such as vehicles and machinery.

Prudential guidance from APRA expects this documentation, valuation and monitoring to be robust, and secured exposures typically attract lower capital charges than unsecured ones. Borrowers disclose assets pledged as security in their financial statements, and lenders may classify repossessed assets as non-performing.