Pledged assets are a traditional lending practice that dates back to ancient Babylonia where crops, olive oil and livestock were used as loan collateral. With modern banking, however, more complex, higher value assets such as real estate, equities, and derivatives are pledged.

In general, for all types of pledged assets, the lender holds a lien against the asset, meaning if the borrower fails to make payments the lender can take possession of the asset to settle the debt. Usually, the borrower must provide a statement saying they will not sell the asset, and pledge it to the lender.

Pledged assets are an increasingly important financing tool for businesses and individuals. Banks, private lenders and even peer-to-peer lenders use pledged assets to reduce risk, secure repayment, and increase the amount of money they can loan.

For example, a small business owner may pledge the equity in their business as a form of loan collateral. This reduces the amount they must pay upfront on their loan and the risk to the lender since they are granted security without the need to take ownership of the collateral.

The potential downside of pledging assets is that when borrowers default on loans, lenders often take possession of the assets, meaning lenders and borrowers may have to invest time, money and effort in liquidating and repaying the loan.

For smaller businesses in particular, pledging assets may make more sense than having to pay a large upfront down payment. As pledge loans are typically secured with a lien, lenders take less risk due to the liquidation of the assets if the borrower fails to pay back the loan.

Overall, pledged assets offer both borrowers and lenders advantages including better interest rates, more favourable loan terms, and reduced risk. For borrowers, pledging assets may mean lower down payments, freeing up capital to grow their business and increase profits. For lenders, pledging assets helps to secure repayment while offering access to more loans. As a result, pledged assets are becoming an increasingly important financing tool for both borrowers and lenders.