What is a floating charge?
When businesses borrow from lenders, the lenders (like banks or other financial institutions) will often ask for security for the debt. There are two main types of charges: floating charges and fixed charges. Find out everything you need to know about floating charge on assets with our simple guide. First off, well clarify the meaning of a fixed charge. Fixed charge definition  A fixed charge is when a debt is secured against a substantial, identifiable asset, such as land, machinery, vehicles, etc. If the business isnt able to stick to the terms of the agreement, then the lender will take control of these assets to recoup the money that its owed. If a lender has a fixed charge, theyll also have a high level of control over the asset. In fact, the business wont be able to sell, dispose, or transfer the asset unless they have permission from the lender. There are many examples of fixed charges, including mortgages, bank loans, invoice factoring, and leases. Floating charge definition  A floating charge (also referred to as a floating lien) is when a debt is secured against a group of non-constant assets, i.e., assets that may change in value and quantity. A floating charge on assets provides you with much more freedom than a fixed charge because you dont need to seek approval from your lender before transferring, selling, or disposing of the assets. Floating charge examples include stock, inventory, trade debtors, and so on. For lenders, fixed charges are preferable to floating charges because the value of the security isnt likely to change. However, as it isnt possible to attach fixed charges to every company asset, floating charges sometimes need to be used instead. As you can see, there are a couple of fundamental differences between floating charges and fixed charges. Weve outlined some of the differences above, but to recap:  Fixed charges apply to specific assets, whereas floating charges apply to all current assets  Assets covered by fixed charges cannot be sold, unlike assets covered by floating charges  Aside from these, theres one key difference between floating charges and fixed charges. Essentially, fixed charges have priority over floating charges in insolvency (meaning that theyll be repaid first if the borrower cant adhere to the terms of the agreement). In fact, floating charge holders are required to wait until fixed charge holders and preferential creditors have received their money before they can begin to recoup their debts. In most cases, floating charges simply float above your businesss changing assets. However, there are a couple of scenarios where a floating charge can become a fixed charge:  The business will cease to exist at some point in the future  The business is about to be shut down  The business appoints the receiver  The business defaults on their repayments, and the lender takes steps to recover their debt  After a floating charge has crystallized, it cant be sold, and the lender can take possession of it. Floating charges and debentures  Its important to note that the status of your debt as falling under fixed charges or floating charges should be outlined in the debenture (a document confirming that the loan has been secured against a companys assets, which is then registered at Companies House). We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.