Floating Charge


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.

BREAKING DOWN '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.

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