What collateral means
Collateral turns a promise into a claim on something.
An unsecured lender who is not repaid has a right to sue and, at the end of that, a judgment. A secured lender has a right in a specific asset, which they can realise if the borrower defaults, and which generally puts them ahead of unsecured creditors if the borrower collapses.
That difference is why lenders ask for it and why interest rates on secured lending are lower. The lender is pricing risk, and collateral removes some of it.
The asset does not always change hands. In a pledge, possession moves to the lender. In a mortgage or a charge, the borrower keeps using the asset and the lender holds a registered interest in it. Most commercial lending works the second way, because a business that has to surrender its equipment cannot trade its way to repayment.
How it is used
Nigerian lenders accept a familiar range of assets, and the paperwork differs for each.
Land and buildings, secured by a legal mortgage. This is the strongest security and the most cumbersome, because it needs the Governor's consent and registration at the lands registry.
Company assets, secured by a fixed charge over specific items or a floating charge over changing assets such as stock. Charges created by a company must be registered at the CAC within the statutory period.
Movable assets, including vehicles, equipment, inventory, receivables and even livestock, registered at the National Collateral Registry.
Financial assets, including fixed deposits, treasury bills and shares, often the quickest to take and to realise.
And personal guarantees, which are not collateral in the strict sense because they are a promise rather than an asset, but which lenders routinely take alongside security from small companies.
Key features
- Gives the lender a claim on a specific asset rather than only a claim against a person
- Secured creditors generally rank ahead of unsecured creditors on insolvency
- Must be perfected by registration to be effective against third parties
- Land security requires Governor's consent and registration at the lands registry
- Company charges must be registered at the CAC within the statutory period
- Movable assets are registered at the National Collateral Registry
How this works in Nigeria
The Secured Transactions in Movable Assets Act 2017 changed the picture for small businesses, and it is still under used.
Before it, Nigerian lending was dominated by land, because that was what could be reliably secured. A business with two million naira of equipment, a warehouse full of stock and solid receivables but no land was effectively unbankable. The Act established the National Collateral Registry, operated under the Central Bank, where interests in movable assets are registered, giving priority and public notice.
That means inventory, vehicles, machinery, receivables and agricultural assets can now support borrowing. Uptake has grown but many small businesses still do not know the route exists.
Perfection remains the point most borrowers and some lenders get wrong. Security that was agreed in a document but never registered can be worthless against a liquidator or a competing creditor, and the deadlines are short. A charge over company assets that misses the CAC registration window is a familiar and expensive error.
Collateral vs guarantee vs lien
Three ways a lender improves their position, and they are not interchangeable.
Collateral is an asset. The lender takes an interest in specific property, and on default they can realise it. Their recovery depends on what the asset is worth.
A guarantee is a person. A third party promises to pay if the borrower does not, and the lender's recovery depends on the guarantor's own means. A guarantee from somebody with no assets adds comfort and nothing else.
A lien is a right to retain. Somebody holding your goods for work done can keep them until they are paid. It arises by operation of law or by contract and it is passive, since it lets the holder refuse to release rather than actively sell.
Lenders to small Nigerian companies commonly take all three: a charge over company assets, a personal guarantee from the directors, and a right of set off over any account they hold.
Limits and risks
Collateral is only worth what it fetches. Equipment sold in a forced sale realises far less than its value in use, and land that is difficult to sell can take years to convert to cash.
Realisation is also slow. Enforcing a mortgage or selling charged assets involves process, and process takes time during which the asset may deteriorate.
Title problems are common. Land offered as collateral in Nigeria frequently has defects in title, missing consent or unregistered prior interests, which is why lenders spend so long on searches.
And from the borrower's side, over securing is a real cost. Pledging assets worth many times the loan ties them up, so they cannot support other borrowing, and lenders rarely volunteer to release surplus security once the balance falls.
Worth knowing
Ask the lender in writing what will be released and when as the loan is repaid, and get it into the agreement. Borrowers routinely discover that security given for a facility repaid three years ago was never discharged, and that the asset is still encumbered when they try to sell or borrow against it.
Questions people ask
What is collateral?
An asset a borrower pledges to a lender as security for a loan. If the borrower defaults, the lender can realise the asset rather than relying only on a claim against the borrower personally.
What can be used as collateral in Nigeria?
Land and buildings, company assets under a fixed or floating charge, movable assets such as vehicles, equipment, inventory and receivables registered at the National Collateral Registry, and financial assets such as fixed deposits and shares.
Can I get a loan without land as collateral?
Yes. The Secured Transactions in Movable Assets Act 2017 created the National Collateral Registry, which allows movable assets including inventory, equipment and receivables to be used as security. Not every borrower knows the route exists.
What does perfecting security mean?
Registering the lender's interest so it is effective against third parties. Company charges are registered at the CAC within the statutory period, land security requires Governor's consent and registration at the lands registry, and movable assets are registered at the National Collateral Registry.
What is the difference between collateral and a guarantee?
Collateral is an asset the lender can realise. A guarantee is a third party's promise to pay if the borrower does not, so recovery depends on that person's own means rather than on any specific asset.
What happens to my collateral when I finish repaying?
The security should be discharged and the registration released. Ask for this in writing, because unreleased security regularly turns up years later when the owner tries to sell or borrow against the asset.