What is a Floating Charge?
Posted on 15th July 2022 at 10:13
A floating charge, often known as a floating lien, is a security interest over a group of non-constant assets whose quantity and value may vary. It is used by businesses to get loans. A loan is typically secured by fixed assets such as real estate or equipment. The underlying assets in a floating charge, on the other hand, are frequently current or short-term assets that can alter in value. It gives business owners access to cash secured by circulating or dynamic assets. The assets underpinning the floating charge are current short-term assets typically used within a year by a corporation. The existing assets secure the floating charge while allowing the corporation to use those assets to continue its business. Current assets, which include accounts receivable, inventory, and marketable securities, among other things, are those commercial goods that can be immediately liquidated for cash. If an inventory is used as collateral for a loan, for example, the company can still sell it, resupply it, and change its value and quantity. In other words, the inventory's value fluctuates in value and quantity over time. It is helpful to businesses as it allows manage their finances by using current assets.
A floating charge becomes a fixed charge through the process of crystallisation. The floating fee becomes crystallised or locked into a fixed amount if the company fails to repay the loan or goes bankrupt. The lender owns the assets at a fixed price, and the corporation cannot utilise or sell them. Crystallisation can also occur when a business shuts down or when a borrower and lender go to court, and the court appoints a receiver. The now-fixed rate security cannot be sold once it has crystallised, and the lender may take control of it.
Tangible assets like buildings or equipment usually back fixed charges. Suppose a firm takes out a mortgage on a building, for example. In that case, the mortgage is a fixed charge, and the company cannot sell, transfer, or dispose of the underlying asset—the property—until the loan is repaid or other requirements in the mortgage contract are met.
Floating charges are very beneficial as they can be established even if the company has no fixed assets. It can provide business owners with a great deal of flexibility, and an unsecured creditor is never more protected than a holder of a floating charge.
For more information, please contact us on +44 (0) 121 442 5330.
If you need help, our debt collection team can assist you anytime.
Share this post: