Floating Charge is a security interest or lien over a group of non-constant assets. It is a charge given by a company to a creditor giving a loan on the condition that the lender will have charges overall assets. The possession of the property is retained by the company. It is a liability to a creditor that relates to the company’s assets as a whole and may become fixed in particular circumstances (such as liquidation). It is dynamic in nature and generally applies to the whole of the company’s property.
A floating charge applies to assets with a quantity and value that can change periodically, such as stock, debtors, and moveable plant and machinery. Companies will use floating charges as a means of securing a loan. A floating charge is a security interest over a fund of changing assets (e.g. stocks) of a company or other legal person. Typically, a loan might be secured by fixed assets such as property or equipment, but with a floating charge, the underlying assets are usually current assets or short-term assets that can change in value. In most countries floating charges can only be granted by companies, LLPs, or similar entities with separate legal personalities. Current assets are those business possessions that the firm can quickly liquidate for cash and include the accounts receivable, inventory, and marketable securities, among other items. That helps to protect the lender’s position as it can seize and sell the asset that has been given as security if the loan cannot be repaid. It can be sold, transferred or disposed of until a point when it crystallizes and becomes fixed. At that stage, the floating charge is converted to a fixed charge over the assets which it covers at that time.
Floating charges allow business owners to access capital secured with dynamic or circulating assets. From the lender’s point of view, a floating charge leaves it more exposed than a fixed charge because the value of the assets can and will change over time. When a business borrows money from a lender such as a bank or another financial institution, it is not unusual for the lender to ask for security for the debt. It is secured by the current assets while allowing the company to use those assets to run its business operations. The advantage of a floating charge is that before insolvency it allows the charged assets to be bought and sold during the course of a company’s or limited liability partnership’s business without reference to the charge holder.
