Collateral is a principle concept in many loans. The idea is that the lender can seek compensation for their investment if the borrower doesn’t deliver on their promise to repay the debt. It legally connects a loan to a piece of property. For example, a prospective business owner might use a car or home as collateral on startup loan. If they don’t pay their loan back, their car or home is them sold to pay off the debt.
A construction lien, also called a mechanics lien, follows the same idea. It’s a legal document that says if a project isn’t paid for, then your business can recoup its investment by taking possession of the property. It’s used in many construction cases from replacing windows in a home to the construction of an entirely new building.