What is a 'Floating Charge'

A floating charge is a security, such as a mortgage or a lien, that has an underlying asset or group of assets which is subject to change in quantity and value. When businesses use floating charges, it does not affect their ability to use the underlying asset as normal. Only if the company fails to repay the loan or goes into liquidation does the floating charge become "crystallized" or frozen into a fixed charge, and the lender becomes the first-in-line creditor to be able to draw against the underlying asset.

BREAKING DOWN 'Floating Charge'

Floating charge securities allow business owners to access capital secured with dynamic or circulating assets. For retailers or others in product-based industries, these securities can provide an effective way to obtain funding using their inventories as collateral without interrupting their business operations.

Difference Between Fixed and Floating Charge

Floating charges exist in contrast to fixed charges, which correlate with fixed assets. Fixed charge securities can be tied to tangible assets, such as buildings or equipment, as well as intangible assets, such as trademarks or patents. Essentially, a fixed charge is a security tied to a specific asset. For example, if a company takes out a mortgage on a building, the mortgage is a fixed charge, and the business cannot sell, transfer or dispose of the underlying asset (the building) until it repays the loan or meets other conditions outlined in the mortgage contract.

Floating charges, in contrast, relate to the current assets of a company, which are subject to change. These securities are tied to an asset, which the borrower may dispose, sell or transfer in the normal course of business. To illustrate, imagine a business takes out a loan and secures it with its inventory. Although the inventory is collateral on the loan, the borrower can still sell and deal with it as usual. As the borrower sells, restocks and changes his inventory, it shifts or floats in value, thus the phrase floating charge. However, if the borrower defaults on repayments, the floating charge security crystallizes into a fixed charge security.

Crystallization of Floating Charge Securities

Crystallization is the process by which a floating charge security converts into a fixed charge security. In addition to cases of borrower default on repayments, crystallization also occurs if the company ends operations or if the borrower and lender go to court and the court appoints a receiver. Once crystallized, the now-fixed rate security cannot be sold, and the lender may take possession of it. Essentially, upon crystallization, the asset underlying the security can no longer float in value; it must crystallize to reduce risk for the lender.

RELATED TERMS
  1. Floating Lien

    A legal claim placed on a set of assets rather than on a single ...
  2. Floating Stock

    The number of shares available for trading of a particular stock. ...
  3. Float

    Money in the banking system that is briefly counted twice due ...
  4. Floating Rate Fund

    A mutual fund that invests in financial instruments with a variable ...
  5. Drop Lock

    An arrangement whereby the interest rate on a floating rate note ...
  6. Availability Float

    The time period between when a deposit is made and when the funds ...
Related Articles
  1. Investing

    Calculating Floating Stock

    Floating stock is the number of shares a company has available for trade in the open market.
  2. Investing

    Floating Rate Loans Look Attractive

    The search for income continues to remain a major priority for investors, as interest rates still sit at historically low levels. In order to get yield, many have moved up the maturity ladder. ...
  3. Personal Finance

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  4. Investing

    Is it Time to Buy Floating Rate Bonds?

    The Fed’s awaited interest rate hike could finally be at hand. Are floating rate bonds the way to go?
  5. Trading

    Interest Rate Swaps Explained

    Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows.
  6. Investing

    FLOT: iShares Floating Rate Bond ETF

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  7. Trading

    Dual And Multiple Exchange Rates 101

    Why would a country choose to implement dual or multiple exchange rates? It's risky, but it can work.
  8. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  9. Investing

    Types Of Shares: Authorized, Outstanding, Float And Restricted Shares

    A company’s financial statements may refer to multiple types of stock, including authorized, outstanding, float and restricted shares. If a company issues more shares, its outstanding shares ...
  10. Personal Finance

    How To Get A Mortgage On A Houseboat

    You actually can't get a mortgage on a houseboat, but you can get a loan. A floating home, however, is eligible for a mortgage. Read on for advice.
RELATED FAQS
  1. How does float affect the nation's money supply?

    Learn how float affects the appearance of the nation's money supply, and receive a brief lesson on how the U.S. government ... Read Answer >>
  2. Why does float usually increase at the beginning of the week?

    Find out more about float and how checking float is created in the American banking system. Learn more about why the Federal ... Read Answer >>
  3. Which of the following strategies is (are) appropriate? I. If a borrower has a fixed ...

    The correct answer is: a) (II) is incorrect because if an investor has floating rate assets and is expecting interest rates ... Read Answer >>
  4. What is the difference between holdover float and transportation float?

    Find out about float, which may become a thing of the past due to the steady decline of check writing and new services in ... Read Answer >>
  5. In what ways has technology helped to reduce float?

    Learn more about the impact of float on the U.S. monetary system and how technology has changed the amount of float as measured ... Read Answer >>
  6. How do I determine a company's floating stock?

    Find out more about floating stock, outstanding shares and restricted stock, and learn how to calculate the amount of a company's ... Read Answer >>
Hot Definitions
  1. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics ...
  2. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  5. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
Trading Center