Floating Charge

Floating Charge: Definition, Uses, and Example

What is a floating charge?

A floating charge is a security interest over a company’s circulating or current assets—such as inventory, accounts receivable, and marketable securities—that are expected to change in value and quantity during normal business operations. Unlike a fixed charge (which attaches to a specific asset and restricts its use), a floating charge allows the company to continue using, selling, and replacing the secured assets while the charge remains “floating.”

How it works

• The lender takes a lien over a class of assets rather than a specific item.
• The borrower continues to operate normally, buying, selling, and replacing the assets covered by the charge.
• The floating charge provides lenders with security while preserving the borrower’s working-capital flexibility.

Crystallization: when a floating charge becomes fixed

Crystallization is the process by which a floating charge converts into a fixed charge. Common triggers include:
* loan default or breach of covenants;
* insolvency, liquidation, or the appointment of a receiver;
* specific events defined in the security agreement or a court order.

Once crystallized:
* The charge attaches to the assets as fixed security.
* The borrower typically loses the right to deal with or dispose of the secured assets.
* The lender may take control of, or enforce against, the assets to satisfy the debt.

Fixed charge vs. floating charge

• Fixed charge: attaches to identifiable, specific assets (e.g., land, buildings, major equipment). The borrower cannot freely sell or transfer the asset without lender consent.
• Floating charge: attaches to a changing pool of assets. Freedom to use and replace the assets continues until crystallization.

Example: inventory used as security

A large retailer used its inventory as collateral under a floating charge. Because inventory levels and values regularly change with sales and restocking, the lender accepted a floating charge so the business could continue normal trading. Over different reporting periods the retailer’s inventory value moved from roughly $5.2 billion to about $7.1 billion, illustrating how the underlying asset base can fluctuate under a floating charge.

Benefits and risks

Benefits
* Enables companies to access financing using working capital without hindering day-to-day operations.
* Provides lenders with security over a company’s current assets.

Risks and considerations
* Crystallization can suddenly restrict a borrower’s ability to trade, causing operational strain.
* The legal priority and enforcement rights of floating charges vary by jurisdiction; they may be subordinate to certain preferential creditors or fixed charges.
* Clear documentation is essential: lenders and borrowers should define triggers and procedures for crystallization and enforcement.

Key takeaways

• A floating charge secures loans against changing current assets while allowing normal business use of those assets.
• Crystallization converts a floating charge into a fixed charge, after which the lender can restrict or take possession of the assets.
• Floating charges balance lenders’ need for security with borrowers’ need for operational flexibility; legal and priority implications depend on jurisdiction and the security agreement.