Project Finance · Question

What is the difference between primary and collateral security in a project loan?

Short answer

Primary security is the asset the loan itself creates or funds, such as the project's land, building and machinery, over which the lender takes a charge. Collateral security is any additional asset the lender asks for, usually from the promoter or an associate, to add comfort. If the project struggles, the lender can generally look to primary security first and collateral next.

In more detail

The logic is straightforward. A lender prefers to rely on what the project itself produces. Hence the assets bought or built with the loan are charged as primary security, normally by a mortgage over land and buildings and a charge over plant and machinery, with current assets covered under a working capital facility.

Collateral comes in when a lender feels the primary assets alone do not give enough cover, perhaps because specialised machinery would sell poorly, or the project is new and untested. It could be other property owned by the promoter, fixed deposits, or a guarantee from the promoters or an associated company. Collateral does not belong to the project, so it exposes the owner's other holdings.

How the two layers usually differ
Layer	What it typically includes and why
Primary security	Project land, buildings, plant and machinery that the loan helps create, charged because they sit at the heart of the operation
Collateral security	Separate property, deposits or personal and corporate support, added to cover a perceived gap

In practice, the amount of collateral asked depends on the lender's policy, the nature of the project, the promoter's track record and whether any credit guarantee scheme applies. It is a legitimate point for negotiation, especially if the project is strong on cash flow, but no outcome can be assumed.

Understand what you are pledging before you agree

Charging a family home or a business unrelated to the project places it at risk if the loan is not repaid. Read the security clauses, check that the charge is released when the loan is closed, and take legal advice where large assets are involved.

Ask the lender to show how each asset is valued and what cover ratio it is targeting, so you can see whether collateral is truly needed.

Key points

Primary security is the project's own assets, charged first.
Collateral is extra security from outside the project, often the promoter's property.
Collateral exposes assets that the project does not generate, so weigh it carefully.
The need and amount of collateral are negotiable, though not guaranteed to reduce.
Confirm how and when charges are released after full repayment.

Who this applies to

Promoters reading the security clause in a draft sanction.
Owners deciding which personal assets to offer.
Companies weighing a credit guarantee scheme to reduce collateral demands.

Last reviewed 3 October 2026

This answer is general information, not advice on your particular case. Terms, eligibility, and requirements change, so check the current position with the relevant institution or authority.