When it comes to business finances, there are various methods to secure loans or debt. One of these methods is by using a floating charge. This type of charge is a legal tool that can be used by businesses to secure short-term loans or borrowings. In this article, we will discuss what a floating charge is, how it works, and how it differs from a fixed charge.
What is a Floating Charge?
A floating charge is a type of security interest that is used to provide lenders with a legal claim over a company's assets. This charge is called a "floating" charge because it is not attached to any specific asset. Instead, it hovers over a group of assets, which are subject to change over time. This type of charge is often used to secure short-term loans or borrowings.
How Does a Floating Charge Work?
A floating charge can be created over a group of assets, such as inventory, accounts receivable, or equipment. The charge holder (lender) can enforce this charge by converting it into a fixed charge. This means that the lender can take control over the assets that are subject to the charge and sell them to recover the debt owed.
Difference Between a Floating Charge and a Fixed Charge
A fixed charge is a security interest that is attached to a specific asset, such as a property or a vehicle. The lender has a legal claim over that asset and can sell it to recover the debt owed. In contrast, a floating charge is not attached to any specific asset but rather floats over a group of assets. This means that the assets subject to a floating charge can change over time, and the lender's claim is limited to the value of those assets.
Advantages and Disadvantages of a Floating Charge
One of the main advantages of a floating charge is that it allows a company to borrow money without having to provide specific assets as collateral. This means that the company can continue to use those assets for its business operations. However, the disadvantage of a floating charge is that it may be more difficult for lenders to recover their debt if the company goes bankrupt. This is because the assets subject to the charge may have decreased in value or may have been sold.
How to Create a Floating Charge?
A floating charge can be created by a company and a lender by entering into a legal agreement. This agreement must be in writing and must specify the assets subject to the charge. The charge must also be registered with Companies House within 21 days of its creation.
Conclusion
In summary, a floating charge is a legal tool that can be used by businesses to secure short-term loans or borrowings. It is not attached to any specific asset but rather hovers over a group of assets. A floating charge can be converted into a fixed charge, which allows the lender to take control over the assets subject to the charge. However, a floating charge may be more difficult for lenders to recover their debt if the company goes bankrupt.
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