The difference between Fixed and Floating ChargesPublished on 16th December 2019 2019-12-16T12:00:00+00:00 - Last update on 4th July 2020 2020-07-04T20:10:11+00:00
Fixed and floating charges may apply to large-scale borrowing such as debentures - which are, themselves, a type of Secured Loan available, in the main, to large corporate borrowers.
At Rangewell we help businesses of all kinds borrow funds from banks, financial institutions and other companies in the form of loans to fulfil their monetary needs - which can be for the short, medium or long term. The lender will require security against the loan and so the borrower creates a charge over the assets or lien on the property.
The charge refers to the collateral or security provided by the borrower as security for the debt, and usually takes the form of a lien on the company’s assets - something that will be handed over to the lender if the borrower is unable to repay the debt from their business as planned.
This will only happen in a small minority of cases, but the ability to take and sell assets to repay the debt will remove much of the financial risk to the lenders, and enable them to to make an advance at a much lower rate than would otherwise be the case.
Two types of charge
There are two kinds of charge, which are known as fixed or floating. The former is a charge on a particular asset of the company that is identifiable and agreed when the charge is created. The latter is slightly different, which is created over all the assets of the business and not attached to any definite property.
Fixed Charge is defined as a lien or mortgage created over specific fixed assets like land and buildings or plant and machinery. The most common form of fixed charge is against property, but it can also be secured against the agreed value of intangibles such as trademarks, goodwill, copyright, patents and intellectual property. In this type of arrangement, the lender has full control over the collateral asset. Therefore, if the company wants to sell, transfer or dispose of the asset, then either they need to get the approval of the lender or it has to discharge all the debts first.
With a fixed charge, a lender can ensure it is the first creditor to get repaid any outstanding debt if a borrower defaults on the loan. It grants the lender possession of a borrower’s asset in the event of non-payment, and allows them to sell it to be used to pay off the remaining debt.
A floating charge is a lien or mortgage which is not tied to a particular asset of the company - but rather its assets in general. It covers the assets like stock, and the borrower has the right to sell, transfer or dispose off the asset, in the ordinary course of business. The permission of the lender is not required to sell or use an asset and also there is no obligation to pay off the dues first.
The ‘floating’ nature of the charge means these assets might change over time, with the borrower able to move or sell any assets during the normal course of business.
It’s only when the lender has to enforce the debenture in a default that the floating charge ‘crystallises’ which means it becomes a fixed charge. From that point, the borrower will no longer be able to deal with the assets unless they have permission from the lender. In an insolvency or liquidation, a floating charge will give a lender priority over unsecured creditors when it comes to repayments.
It occurs when:
- a company is about to be wound up.
- a company ceases to exist
- a court appoints a receiver.
- a company defaulted on payment, and the lender has taken action against it to recover the debts.
It is possible for a lender – or lenders – to have multiple debentures on the same borrower. These can either be fixed debentures against different specific assets, floating debentures, or a mixture of both. There can also be multiple lenders, and when several lenders have a lien against the same borrower’s assets, the lenders will agree priority of payments between themselves. This is usually documented between the lenders and borrower with a Deed of Priority.
Do you need a debenture?
Some lenders won't lend above a certain amount without a debenture so, regardless of how much you’re looking to borrow, you may need to provide your assets as security. In this case, an Unsecured Loan might be a better option for your business, although it could mean borrowing less and paying a higher rate of interest.
At Rangewell, we know that there are many solutions when you need to raise money for your business. To raise the funding that is most appropriate for your particular needs, simply call us for help. Our team of business finance experts work with you to get to know your business and understand the kind of arrangement and features that are right for you, plus our service is free. So whether you need to finance new assets, or are looking for other products such as secured finance or growth finance, Rangewell can help you support your goals.
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