Key Takeaways
- Security interest over changing business assets.
- Allows borrower to trade assets freely.
- Crystallises to fixed charge on default.
- Lower priority than fixed charges in insolvency.
What is Floating Charge?
A floating charge is a security interest over a pool of changing business assets that secures a loan while allowing you to continue using and trading those assets in your normal operations. Unlike a fixed charge tied to a specific asset, a floating charge covers generic asset categories that fluctuate over time.
This flexibility makes floating charges common in business lending and facilities where ongoing asset turnover is essential.
Key Characteristics
Floating charges have distinct features that differentiate them from fixed charges:
- Asset Coverage: Secures generic business assets like inventory and accounts receivable that change regularly.
- Operational Flexibility: You can buy, sell, or replace assets without lender approval during normal business activities.
- Crystallisation: The charge becomes fixed if you default or the company enters liquidation, enabling asset seizure.
- Lower Priority: In insolvency, floating charge holders rank below fixed charge holders and preferential creditors.
- Interest Rates: Typically higher due to increased lender risk from asset variability.
How It Works
Floating charges "float" over a pool of assets that your business uses daily, such as stock and cash flow, without restricting your ability to manage those assets. This makes them ideal for businesses reliant on inventory turnover or receivables.
When certain events like default or liquidation occur, the floating charge crystallises into a fixed charge, attaching to specific assets and allowing the lender to enforce their security interest. Until then, the charge remains dormant, providing operational freedom.
Examples and Use Cases
Floating charges are widely used in industries needing asset flexibility to support ongoing operations:
- Airlines: Companies like Delta leverage floating charges to secure loans against changing assets such as equipment and receivables while continuing daily operations.
- Retail Businesses: Retailers use floating charges over inventory and accounts receivable to finance working capital without halting sales.
- Revolving Credit: Businesses often incorporate floating charges into credit facilities to maintain access to funds while assets fluctuate.
Important Considerations
When using floating charges, understand that lender risk and interest rates tend to be higher because the asset pool changes frequently. Ensure you monitor triggers that could cause crystallisation, as this restricts asset use and may lead to enforcement.
Balancing operational flexibility with lender security interests is key, and floating charges often complement other loan structures or financial instruments tailored to business needs.
Final Words
A floating charge offers flexibility by securing a shifting pool of assets while allowing ongoing business operations. To ensure it suits your financing needs, review the terms carefully and consult a financial advisor before committing.
Frequently Asked Questions
A floating charge is a security interest over a pool of changing business assets, allowing the borrower to use and trade those assets during normal operations while securing a loan.
Unlike a fixed charge that attaches to specific assets, a floating charge covers generic, changing assets and lets the borrower freely manage them until the charge crystallises upon default or liquidation.
Floating charges usually cover business inventory, accounts receivable, cash flow, and other current assets that naturally change as part of daily business.
A floating charge crystallises into a fixed charge when events like loan default, liquidation, or cessation of business occur, allowing the lender to seize secured assets.
Floating charges offer businesses flexibility to manage assets freely while providing broad security over multiple asset categories for lenders.
They often have higher interest rates due to lender risk, lower priority in insolvency, and the risk that the charge will crystallise, restricting asset use.
Because the charge covers changing assets and offers less security to lenders compared to fixed charges, lenders assume more risk and charge higher interest rates.
Yes, one key feature of a floating charge is that the borrower can freely buy, sell, or replace assets during normal operations without needing lender consent.
