For an example, you would like to borrow $200,000 to start a business. Even if you have an a excellent credit rating, a bank may be reluctant to lend you the money because it may be left with nothing if you default on the loan. Thus the bank may require $200,000 of collateral in order to lend you the money . This collateral might consist of financial instuments, for an example, Houses,Cash or even objects such as art, jewelry or other items. You might also pledge your business receivables as well.
So, if you do in fact default on the loan, the loan agreement gives the lender the right to seize and then sell the collateral in order to recover any oustanding balance