What is a Floating Charge?
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Even for seasoned UK business owners, searching for business finance can be an intimidating process. As well as having to source a suitable business finance product, you also need to make certain that you’re fully aware of all the aspects of the agreement which is placed before you. But if you’re being presented with financial terminology that you don’t understand, that can be easier said than done. One area that often leads to confusion involves Floating Charges, which come into effect should a company fall into liquidation. So, to enable you to be confident that you’re making the most appropriate decision for your business, here is what Floating Charge means in company law.
What is a Fixed and Floating Charge?
Fixed and Floating Charges are two aspects of a Debenture agreement, usually arranged alongside products such as Business Loans, Commercial Mortgages, Factoring, Discounting and Goodwill Loans. The purpose is to provide you and your creditors clarity regarding the order of repayment in the event of your business entering liquidation. So what exactly does a Fixed and Floating Charge mean in company law?
A Fixed Charge can concern one or more specific assets logged within your business’ balance sheet, which is used as collateral to secure a financial agreement. This could involve anything from equipment, machinery, vehicles or property depending on the product in question. Therefore, if your business defaults and/or falls into liquidation, the creditor can repossess the asset(s) in order to reclaim the capital that they’re owed. As such, if you have any asset(s) that are subject to a Fixed Charge, you cannot sell or dispose of the asset without seeking prior permission from the creditor concerned.
According to company law, if your business becomes insolvent, you’re required to resolve the debts that you owe to your employees and suppliers first. Yet once this has been completed, you can then move on to repaying any lenders and financial institutions to whom your business owes money to. However, by offering a Debenture to a specific lender, you’ve given them priority over any other lenders who don’t. As such, they can go in and reclaim the asset(s) which are subject to a Fixed Charge first. But, if the asset(s) fail to resolve all of the debt, the Debenture also provides them with a Floating Charge. This means that they have the right to repossess any assets on your balance sheet which aren’t subject to a Fixed Charge with anyone else until the debt has been resolved. Therefore, a Floating Charge is a mechanism which is used to provide Debenture holders with an additional layer of security in the event of your business becoming insolvent. Additionally, to answer a question that many prospective borrowers ask - Yes, a company can offer more than one Floating Charge.
How can I support my business’ finances?
Naturally, avoiding the risk of insolvency is the goal of any UK business owner, and depends on your ability to maintain your business’ finances. However, as you continue to trade, it can sometimes seem like a tall order. Especially if you’re in the midst of a period of slow trade or are waiting on late customer payments. However, there are a variety of ways in which you can support finances and maintain your bottom line. So, whilst Fixed and Floating Charges offer Debenture holders another layer of protection, you could safeguard your business’ success by applying for solutions such as Merchant Cash Advance, Invoice Factoring, Overdraft Replacement or Asset Refinance. All you need to do is source the most appropriate agreement for your business.
Need help sourcing a suitable finance agreement for your business?
Although it can be exciting to see your ideas thrive, managing a business isn’t for the fainthearted. As you continue to trade, there are a number of challenges that you will need to overcome in order to support growth and stay above your bottom line. But that can be a difficult task to achieve on your own, which is where the Alternative Finance industry could help. Providing access to a new generation of business finance solutions and specialist lenders, the challenge standing before you now is choosing a suitable business finance solution from a lender you can trust - which is where we can help.
At Rangewell, we’re an Access to Finance specialist who have mapped over 400 lenders to offer you a comprehensive overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. So if you’re looking to apply for business finance and aren’t sure about what exactly the agreement involves, apply for Alternative Business Finance today or find out more with Rangewell.