What it means
When a business borrows money, lenders often want security. A fixed charge locks down specific, permanent assets like a building or heavy machinery, meaning the company cannot sell them without the lender's permission.
However, companies also need to buy and sell everyday items, such as retail stock or raw materials, to stay in business and make a profit. This is where a floating charge comes in.
It hovers over a changing pool of assets rather than a single fixed item. While the business runs normally, it can freely buy, sell, and replace these assets without asking the lender every time.
The charge only settles or 'crystallises' onto the remaining assets if the company defaults on its loan, such as missing payments or entering insolvency. At that exact moment, the floating charge locks into place, behaving much like a fixed charge.
For non-finance managers, understanding this concept is vital when negotiating loan agreements or credit lines. Lenders use floating charges to secure general business borrowing, giving them a safety net if things go wrong.
However, floating charges usually sit lower in the repayment priority queue than fixed charges and specific preferential debts, such as unpaid employee wages, during an insolvency process. In daily operations, management must balance their operational freedom against these lender rights.
Knowing which assets are encumbered by floating charges helps managers assess true business liquidity and creditworthiness. It also highlights the importance of maintaining good cash flow to avoid triggering a crystallisation event that would freeze everyday trading operations.
In practice
Real-world examples.
Example
A fashion retailer borrows fifty thousand pounds to buy seasonal stock. The lender takes a floating charge over the changing inventory, allowing the shop to sell dresses daily without seeking prior permission for each sale.
Example
A catering company secures a business overdraft using a floating charge over its changing food supplies and catering equipment, letting chefs use ingredients freely while keeping the bank financially protected.
Example
A tech distributor uses a floating charge over its rotating warehouse inventory to secure a wholesale loan, enabling the firm to dispatch computer parts to clients daily while keeping the lender secure.
Think of it
“Imagine a security guard watching a herd of sheep in an open meadow. The sheep can graze, run around, and move freely day-to-day. But if a dangerous storm approaches, the guard closes the gate and rounds them all up into a single, fixed pen.
Case study
Seen in the real world.
Oakwood Retail Supplies, a mid-sized distributor of office furniture, needed a cash flow loan of one hundred thousand pounds to manage seasonal demand peaks. Their bank agreed to provide the funds, secured by a floating charge over Oakwood's fluctuating warehouse inventory and trade receivables. For eight months, Oakwood operated normally. Managers bought new desks and shipped orders to clients every day without needing bank approval for each transaction. Unfortunately, a major corporate client went bankrupt, leaving Oakwood with unpaid invoices totalling forty thousand pounds. Oakwood subsequently missed two consecutive loan repayments to the bank. This triggered the default clause in the loan agreement, causing the floating charge to crystallise instantly. The bank froze the floating pool of assets, converting the security into a fixed claim over the remaining inventory and uncollected debts. When administrators were appointed, the bank used the crystallised assets to recover seventy thousand pounds of the outstanding loan balance.
Watch out
Common mistakes.
- Assuming a floating charge restricts everyday sales of inventory and stock.
- Believing floating charges have top priority over all other debts during liquidation.
- Forgetting that a floating charge automatically locks into place if the company defaults.
Questions
People also ask.
Can a company sell assets covered by a floating charge?
Yes. While the business is solvent and trading normally, it can buy, sell, and replace those assets without lender permission.
What causes a floating charge to crystallise?
Crystallisation happens when the company defaults on the loan, goes into administration, or ceases trading, turning the floating asset pool into a fixed claim.
How does a floating charge differ from a fixed charge?
A fixed charge applies to specific, immovable assets like property that cannot be sold easily, whereas a floating charge covers a shifting pool of everyday business assets.
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