What it means
A floating lien is created when a lender takes a security interest in categories of collateral rather than in named items, and the loan documents include an "after-acquired property" clause. Stock that arrives next month is automatically covered without any fresh paperwork.
The lender makes the interest effective against other creditors by filing a public financing statement. The commercial logic is simple: a trading company cannot pledge its inventory and then be forbidden from selling it.
Buyers in the ordinary course of business take goods free of the lien, so customers never get dragged into the lender's security arrangements. The lien effectively follows the value as it moves from stock to invoice to cash.
Why this matters to a finance team is borrowing capacity. Asset-based lenders size a revolving facility off a borrowing base, applying advance rates to eligible receivables and inventory and recalculating monthly or even weekly.
A business with seasonal working capital can therefore borrow more in its busy period and repay automatically as receivables convert to cash. The trade-off is control and reporting burden.
Floating lien facilities come with borrowing base certificates, field audits, inventory appraisals and often a lockbox arrangement where customer payments go directly to the lender. Covenants also restrict granting any competing security, which can block a future equipment loan without the incumbent lender's consent.
Priority disputes are the sharp edge of this structure. A purchase money security interest taken by an equipment or inventory supplier can outrank an earlier floating lien over the specific goods it financed, provided the supplier files correctly and within the required window.
Lenders therefore monitor new filings against their borrowers closely.
In practice
Real-world examples.
Example
An apparel importer with $3,000,000 of seasonal inventory secures a revolving line under a floating lien. Its borrowing capacity peaks in September as stock arrives and falls through January as goods sell and invoices are collected, which matches the natural rhythm of its cash needs.
Example
A steel service centre grants a floating lien to its asset-based lender, then buys a $600,000 cutting machine on supplier finance. The supplier files a purchase money security interest within the statutory window and takes first priority over that machine, ahead of the earlier floating lien.
Example
A food processor fails and its lender enforces a floating lien over inventory and receivables. Because perishable stock realises only 30% of book value while receivables collect at 82%, the recovery is driven almost entirely by the debtor book, and the lender rewrites its advance rates for all food sector borrowers.
Formula
Calculation
Borrowing Base = (Advance rate x Eligible receivables) + (Advance rate x Eligible inventory)
Availability = Borrowing Base - Loan outstanding
Kettleby Distribution has a revolving facility secured by a floating lien, with an 80% advance rate on eligible receivables and a 50% advance rate on eligible inventory. At month end it has gross receivables of $720,000, of which $120,000 are more than 90 days old and therefore ineligible, leaving $720,000 - $120,000 = $600,000 eligible. Eligible inventory is appraised at $400,000.
The borrowing base is (0.80 x $600,000) + (0.50 x $400,000) = $480,000 + $200,000 = $680,000. With $620,000 drawn, availability is $680,000 - $620,000 = $60,000 of additional headroom.
Two months later trading slows. Eligible receivables fall to $450,000 and eligible inventory rises to $420,000 as unsold stock builds up. The new base is (0.80 x $450,000) + (0.50 x $420,000) = $360,000 + $210,000 = $570,000. Against the same $620,000 drawn, Kettleby is now $620,000 - $570,000 = $50,000 over-advanced and must repay that amount immediately, exactly when cash is tightest.Case study
Seen in the real world.
The following is an illustrative and fictional example. Bramfield Supply Corp, an invented industrial parts distributor, financed itself with a $4,000,000 revolving facility secured by a floating lien over inventory and receivables. Advance rates were 85% on receivables under 90 days and 45% on inventory, tested monthly through a borrowing base certificate.
In its third year Bramfield's largest customer stretched payment terms from 45 days to 100 days. Receivables that had counted as eligible collateral drifted past the 90-day cut-off, and $900,000 of the debtor book became ineligible almost overnight. The borrowing base fell by 0.85 x $900,000 = $765,000, forcing Bramfield to repay $765,000 it did not have spare.
The company survived by negotiating a temporary over-advance in exchange for a higher margin and weekly reporting, then diversified its customer base. The illustrative point is that under a floating lien, collateral eligibility rules, not the balance sheet, determine how much a business can actually borrow.
Watch out
Common mistakes.
- Assuming all inventory and receivables count as collateral. Lenders apply detailed eligibility tests, and slow-moving stock, intercompany balances and aged invoices are routinely excluded from the borrowing base.
- Thinking the lien blocks ordinary sales. Customers buying in the ordinary course of business take clear title, and the lien attaches instead to the resulting invoice and then to the cash.
- Ignoring the priority rules for supplier finance. A properly filed purchase money security interest can leapfrog an existing floating lien over specific goods, which surprises lenders and borrowers alike.
Questions
People also ask.
How is a floating lien different from a floating charge?
The commercial effect is nearly identical, but a floating lien is a security interest under United States commercial law while a floating charge is a creature of English law and related systems.
What triggers a repayment demand under a floating lien facility?
Usually a fall in the borrowing base rather than a missed payment, because the loan must always stay within the calculated collateral value.
Does the lender have to file anything?
Yes. Perfecting the interest normally requires filing a public financing statement, and failing to file correctly can leave the lender ranking as an unsecured creditor in an insolvency.
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