Collateral
From ForcaWiki, the simple encyclopedia
| In one sentence | Something valuable a borrower promises to a lender, which the lender is allowed to take if the borrower does not pay back what they owe. |
|---|---|
| Category | Finance |
| Related | Debt, Asset, Advance Rate |
Imagine a pawn shop. You bring in something valuable, like a bike, and the shop hands you cash right away, on the promise that you can come back and buy the bike back later once you repay them. But the shop keeps the bike the whole time as insurance. If you never pay them back, the shop simply keeps the bike and sells it. That bike is collateral.
Collateral works the same way in bigger loans. When a bank lends money, especially a large amount to make a movie, it usually wants collateral: something valuable it is legally allowed to take and sell if the Debt does not get repaid. In the movie business, that collateral is often the film itself and its future earnings, or a contract promising future money, like a distributor's Minimum Guarantee.
Why lenders want it
Collateral lowers the risk for whoever is lending the money. Even if the borrower cannot pay, the lender still has something valuable to fall back on. That is part of why banks feel comfortable lending huge sums toward a movie that does not exist yet: they are not lending against a finished film, since there is not one yet, they are lending against the rights and contracts that back it, using an Advance Rate to decide exactly how much to hand over.
Fun facts
- Almost anything valuable can serve as collateral, from a house, to a truck, to the future earnings of a movie that has not even been shot yet.
- If a production runs into serious trouble, arguments over exactly who gets to keep the collateral, like unfinished footage or the rights themselves, can end up being settled in court.
- Collateral is one reason a business's list of assets matters so much to lenders: the more valuable things a company owns, the more it may be able to offer as collateral.