Floating Charge

AAA

DEFINITION of 'Floating Charge'

A security (i.e. mortgage, lien, etc.) that has an underlying asset or group of assets which is subject to change in quantity and value. Corporations can use floating charges and it does not affect their ability to use the underlying asset as normal. Only if the company fails to repay the loan and/or goes into liquidation, does the floating charge become "crystallized" or frozen into a fixed charge. At that point the lender becomes the first-in-line creditor to be able to draw against the underlying asset and/or its value to recoup its loss on the loan.

INVESTOPEDIA EXPLAINS 'Floating Charge'

Consider an example of a floating charge:

A business that operates in rental of large pieces of machinery might apply for a mortgage to obtain a new building. The lender will make the loan and take a floating charge using the rental equipment (the businesses' inventory) as the asset to secure the mortgage. Although the machinery could be repossessed in the event that the business failed to make timely repayment on the mortgage, the floating charge does not prohibit the company from continuing to rent the machinery out as normal.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Lender

    Someone who makes funds available to another with the expectation ...
  3. Surrender Charge

    A fee levied on a life insurance policyholder upon cancellation ...
  4. Security

    A financial instrument that represents: an ownership position ...
  5. Corporation

    A legal entity that is separate and distinct from its owners. ...
  6. Asset

    1. A resource with economic value that an individual, corporation ...
RELATED FAQS
  1. Where can I find year-to-date (YTD) returns for benchmarks?

    Benchmarks are securities or groups of securities against which investment performance is analyzed. Examples of popular equity ... Read Full Answer >>
  2. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  3. Under what circumstances would someone enter into a repurchase agreement?

    In finance, a repurchase agreement represents a contract between two parties, where one party sells a security to the other ... Read Full Answer >>
  4. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  5. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  6. What type of asset allocation should I use if I am already retired?

    Among investors, asset allocation is a topic of discussion that receives a great deal of weight during the asset accumulation ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  2. Fundamental Analysis

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  3. Investing Basics

    Understanding The Cash Conversion Cycle

    Find out how a simple calculation can help you uncover the most efficient companies.
  4. Entrepreneurship

    In Small Business, Success Is Spelled With 5 "C"s

    Incorporating these steps will help your business thrive in a competitive market.
  5. Investing Basics

    5 Things To Know About Asset Allocation

    Overwhelmed by investment options? Learn how to create an asset allocation strategy that works for you.
  6. Fundamental Analysis

    Analyzing Retail Stocks

    To analyze retail stocks, investors need to be aware of the most common metrics used. Find out what they are.
  7. Options & Futures

    Find Investment Quality In The Income Statement

    Use these key attributes to uncover top-level investments.
  8. Markets

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  9. Markets

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
  10. Markets

    What Is A Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!