What Is a Floating Charge & Fixing Charge? Difference
These charges are used to secure the borrower's obligations to their lenders. Floating charges are used to secure current assets against liquidation or foreclosure. They work by giving the lender an interest in any asset that is not already encumbered with a fixed charge. Floating charges often apply only to specific types of assets. These include accounts receivable, stocks and shares, and inventory.
This article will discuss floating and fixing charges in depth. You'll learn what they are, why they're important and more.
Here’s What We’ll Cover:
More About Floating Charges and Fixing Charges
These charges are ways of granting security over assets. The difference between them is the order in which the assets are available to be sold. This does not make one charge better than the other. It will depend on your circumstances as to which would suit you best.
One thing that seems unusual about both charges is that at least one must give priority to another charge in the event of liquidation.
The priority will depend on the wording of the charges. If priority is not specified, priority will be given to charges created before or at the same time as both floating and fixing charges. When it comes to priority between floating charges themselves, their purpose determines which has priority. This is because this charge is classified as a mortgage when it comes to priority. If fixing charges are involved, they too must specify their purpose. This will ensure that the correct order is followed when liquidation occurs.
Here is more about each type of charge.
The most common of these are 'floating charges'. This charge is on assets that will be used in the course of your business. It does not apply to specific assets. It applies to all assets at a certain time until further notice. For example, you may use the same trucks every day for deliveries. These would come under a floating charge. If you have a factory building, this would come under the fixing charge.
A floating charge is an 'all assets' type of charge. It covers assets that are specific at one time and not specific thereafter. Fixed charges tend to be on assets that are always available for use by other people in your business. Examples would be a machine that is used by your workers all the time.
Advantages of Floating Charges
- A floating charge allows your business to continue on as normal without having to seek the consent of another secured creditor. This is because you can sell on some or all of the assets even if you don't own them anymore.
- One great advantage of a floating charge over a fixed one is that it can be removed at any time.
- If your business goes down, another will take your assets. This would only happen in an emergency situation where there are no other assets to use.
Disadvantages of Floating Charges
- There are many issues with floating charges but the most serious ones are related to personal liability.
- If the business goes bust, as soon as you receive any money you will immediately become liable.
- Another problem with this charge is that it does not stop you from selling off all your tangible assets and pocketing the cash. The other preferential creditors would then have no assets to sell on.
These are used for borrowing money to finance one particular class of asset. They apply only to specific assets that are owned by the business. This prevents you from selling off all other assets while still paying off your fixed charge liability. They are not easy to obtain either because they look unprofessional.
Fixed charges are in place to protect the assets in question in case of an emergency. You may want to gain protection for all your factory machinery if it is vital to your business.
Advantages of Fixed Charges
- Fixed charges are great for larger businesses with many assets that take up a lot of space or equipment. It ensures that the business will not be able to sell the assets without the permission of whoever holds that specific charge.
- Another great feature is that you can use this type of charge over any asset within your business. This makes the charges ideal for when you want to protect certain equipment in your factory or warehouses.
Disadvantages of Fixed Charges
- Some people do not like fixed charges because they fear that the protection is too strong.
- If these assets are sold off, you can't do anything about it. If you ever need to borrow money from a bank or another business, they would never be interested in this type of charge against your assets.
Floating charges and fixed charges are two types of financial securities that offer different protections for your assets. Floating charges allow you to continue operating as normal without seeking the consent of a secured creditor. It does not stop you from selling off all other assets while still owing money on this charge.
Fixed charges protect one particular asset in case of emergency. This can be ideal for larger businesses with many valuable resources. One disadvantage is that these types of loans can look bad to financial institutions.
This article has provided insight into both floating and fixing charges. Hopefully it answers all of your questions regarding these two types of charges.
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