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A fixed or floating charge may refer to any collateral provided to secure a debt through the mortgage of the assets owned by your company. The two types of charge operate somewhat differently:

The floating charge is:

  • not attached to a definite asset
  • is usually created on circulatory assets

The fixed charge is:

  • created on the company’s real assets
  • is quite easy to identify and ascertain when the charge was created

A company can borrow finances from banks or other loan providers in order to meet its core financial needs. If you need to learn more about a fixed charge and floating charge, we have a skilled and diligent team of financial experts who have been working with many businesses and can inform on fixed and floating charges. Many moneylenders demand security against loans, so as a borrower, you have to create a charge over the company assets. It is helpful to better understand the distinction between the two types of charges used.

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589,008 new businesses were formed in the UK in 2017, down from 657,790 the previous year.

Four Key Questions on fixed and floating charges


How does a floating charge and a fixed charge work?

When it comes to considering the questions; what is a floating charge and what is a fixed charge, it is important to have an understanding of how each work. A floating charge refers to a mortgage or loan which is not attached to any asset owned by the company. The charge is usually dynamic and the value and quantity of assets can change over time. A floating charge is utilised as a mechanism for securing the repayment of funds.

The floating charge covers a variety of assets including some vehicles, debtors and stocks. Under this type of arrangement, the borrower reserves the right to dispose of, transfer or sell the assets in due course of the business activities. The lender is not required to provide any permission and there is no requirement to settle the due liability first.

A fixed charge is a mortgage or loan created over identifiable and particular fixed assets including: machinery, buildings and/or land and book debt ledger. Other fixed assets include patents, copyrights and trademarks. A fixed charge also includes any asset that cannot be sold by the firm easily. A fixed charge is usually created to secure and guarantee repayment of debt. Under the arrangement, the lender has a level of control over the borrower’s collateral asset. If the firm wants to transfer or sell the assets, approval from the lender is required.

 

What are the major differences between floating charges and fixed charges?

The key differences between fixed charge and floating charge include:

  •  If an asset is covered under floating charge, the firm can trade with it. Conversely, under a fixed charge, the firm cannot deal with that asset until the lender agrees
  •  Many lenders prefer a fixed charge over a floating charge
  •  The registration of both a fixed and floating charge is compulsory.
  •  A floating charge is dynamic in nature while a fixed charge is specific
  •  A floating charge is created on assets that change from time to time. On the other hand, a fixed charge can be easily identified with a specific asset

 

What is the importance of fixed and floating charges?

Both a fixed charge and floating charge provide the creditor with a security over the borrower’s assets. In the event of insolvency, fixed and floating charges give the lender a higher priority for any net proceeds that may come from the sale or transfer of the debtor’s assets. British law gives creditors the power to take security over assets owned by the borrower. The main distinction between the floating and fixed charges is the ability of the borrower to dispose of the business assets.

The debtor’s level of control over an asset determines whether the charge will be categorised as floating or fixed. If the borrower has no power to control a given asset, it will be categorised as a fixed asset. If the borrower has control over an asset, it will be categorised as a floating charge. In essence, a floating charge will cover future and current assets such as business stock.

A fixed charge is usually used to secure specific assets such as shares, equipment and land. The borrower can dispose of assets categorised under floating charges in the ordinary course of the business. However, the freedom of the debtor to dispose of assets categorised in a floating charge stop when such charges crystallise, which happens when an administrator or receiver is appointed.

A fixed charge is less flexible than a floating charge. As soon as a floating charge crystallises, the borrower can no longer dispose of or transfer the specific assets in the due course of the business activities. Both charges safeguard the creditor, especially when the business faces liquidation. A floating charge agreement must include all the necessary terms and conditions that explain the circumstances under which crystallisation may happen. In most cases, floating charges crystallise after a company’s liquidation or default on a loan repayment.

 

How do I find the right help with fixed and floating charges

If you wish to learn more about a fixed charge and floating charge, which can seem complex at times but are a useful way to secure vital financial support against your assets, then contact The Insolvency Experts for further professional advice.

We have a highly trained and certified team of financial experts who will be delighted to help you understand how fixed and floating charges can affect your business. Get in touch with us by phone or email for expert and personable financial advice, with all of our details available over on our Contact page.

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