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 Interest Rate

    An interest rate that is allowed to move up and down with the ...
  3. Fixed Charge

    Any type of fixed expense that recurs on a regular basis. Fixed ...
  4. Float

    Money in the banking system that is briefly counted twice due ...
  5. Floating Stock

    The number of shares available for trading of a particular stock. ...
  6. Finance Charge

    A fee charged for the use of credit or the extension of existing ...
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 Stock

    Floating stock is the number of a company’s shares that are available for the public to buy and sell.
  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

    Senior Floating Rate Loans Provide Income and Value

    While equity volatility prompted handwringing among investors, one of the most vexing issues in the current environment is in the fixed income market.
  7. 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.
  8. Trading

    Understanding the Floating Exchange Rate

    Floating exchange rate is the exchange rate between two currencies at any given time.
  9. 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.
  10. Investing

    What's a Fixed Asset?

    Fixed assets are tangible property that a business uses in the process of producing income. To qualify as a fixed asset, the item cannot be consumed or sold in less than a year. Fixed assets ...
RELATED FAQS
  1. What does floating stock tell traders about a particular stock?

    Learn about what floating stock tells a trader about a particular stock. One commonality of the biggest winners in stock ... Read Answer >>
  2. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Discover how the fixed charge coverage ratio is useful to investors and analysts, and when it suggests that a company should ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center