A euphemism is a word that you use for a potentially offensive word, to make it sound more polite. collateral can be a few things, but the most common one apart from that in collateral damage, is 'property used to secure a loan'.
collateral in 'collateral damage' means secondary. So collateral damage is unintended damage other than the intended damage.
So: 'little boys room' is a euphemism for a toilet.
Sorry sir, we can't give you a loan, as you do not have enough collateral
You need to be very accurate with your bombing - we don't want any collateral damage.