Financing for limited companies can be difficult. Most lenders will demand some form of security for the debt before lending money – this offers the lender protection should you fail to make adequate repayments.
This procedure is not uncommon and most businesses will be aware of this before even attempting to access financing. The complexities however, lie with the fact that there are two different charges, fixed and floating.
What is a fixed charge?
A fixed charge is a charge for finance against a tangible, physical asset such as property, land and machinery. Said assets will be used as collateral should the business fail to repay their debts when owed, or fail to agree on suitable repayment terms.
What is a fixed charge over assets?
A lender has full control of fixed assets used as security against a debt and if the business needs to take back control of the asset to sell or remove, they will need to pay off the remainder of their debt with the lender.
Examples of fixed charges
The most common examples of fixed charges are:
- Standard bank loans
- Rentals and Leases
- Rent deposits
- Invoice Factoring
What is a floating charge?
A floating charge is a charge that is held over assets but ‘floats’, meaning that it can change over time as the business changes and assets move. Certain assets and stock can change periodically – this includes machinery and plant, for example.
What is a default of a floating charge?
This is when the business defaults on payments owed to the lender and the lender is able to issue a demand for repayment.
Examples of floating charges
Floating charges can be held over numerous things, including:
- Furniture, fixtures and fittings
- Plant and machinery
What is the main difference between fixed and floating charges?
The main differences between fixed and floating charges are as follows:
- Fixed charges relate to physical, identifiable assets whereas floating charges are flexible and apply to business assets as a whole.
- A fixed asset cannot be sold or disposed of without the lender’s authorisation, whereas floating charges can be changed until they are ‘crystallised’ as fixed.
- Fixed charges are higher in the hierarchy than floating charges in cases of business insolvency and creditor payment.
What happens if a company becomes insolvent?
If your business becomes insolvent, there is a particular hierarchy that will be followed when creditors are repaid with the sale of company assets.
It may depend on the type of formal insolvency process that a business takes, but the priorities are typically the same. Take Liquidation for example; in this case, both fixed and floating charges are secured, meaning that they will take priority over unsecured creditors and will have to be paid first.
FAQs about fixed and floating charges
What is a debenture in fixed and floating charges?
A debenture is a document that details the fixed and floating charges and the relevant terms for them. This prevents other lenders from trying to use those specific assets as security against their financing.
What is a Deed of Priority?
A Deed of Priority ranks the secured creditors when there are multiple lenders to one business. This will be referred to in the case of business insolvency and when the necessity for asset sales arises.