fixed and floating charge document

What are Fixed and Floating Charges?

Education

advantages and disadvantages of fixed and floating chargesFixed and Floating charges are when a business borrows money from a lender such as a bank or another financial institution, it is not unusual for the lender to ask for security for the debt. 

That helps to protect the lender’s position as it can seize and sell the asset that has been given as security if the loan cannot be repaid.

It is highly important for anyone running a business or involved in the inner workings of a company to understand the differences between floating charges and fixed charges, especially if you’re looking to borrow funding at any stage in the near future.

You see, understanding how different charges work and are applied can make all the difference when it comes to your venture either thriving or not. So, with that thought in mind, you should look to brush up on your knowledge whenever you have the opportunity to do so.

Most financial institutions, such as high street banks, will usually look for security when lending money, and so they will perform a number of checks. This security goes further than a simple credit check as UK banks want to be certain that they will regain the money they lend, as well as any added charges, if the loanee becomes unable to make repayments. This is used to protect the lender in a sense.

Take mortgages for example; if an owner of a home begins to have trouble making repayments, the lender can recoup all the funding by taking back the property, etc. This is an example of a fixed charge, which is starkly different to a floating charge. Read on further to gain an overview of floating and fixed charges and become able to clarify the main differences of the two types of charges.

Here is our guide 

The idea of providing security for a loan is a concept most business owners will be familiar with, after all, it’s something all homeowners do when arranging a mortgage. However, the confusion often comes with the two different types of charge, fixed and floating, that are used to give lenders security over the assets of a business.

In our quick guide, we’re going to explain what fixed and floating charges are and explore the differences between them, so you’ll know what you’re signing up for.

What is a fixed charge?

The reason we have already mentioned mortgages is because they are a prime example of fixed charges. You will often see fixed charges being placed against property, land, or large parts of a business’ infrastructure, such as heavy or immovable machinery. 

These fixed charges can be attached to a wide variety of things within a business however, and do not necessarily need to be in a physical form. They can also range from copyright and intellectual property, to mortgage repayments and debts.

The lender has a great deal of control over fixed charges, which is something that unifies them together. If the owner of a business ever wishes to sell a fixed asset, they must first gain the approval of the lender. The only time this step, which involves company assets, does not need to be taken is when all outstanding debts have been resolved.

Fixed charge examples

Fixed charges are over substantial and physical assets. Examples include:

  • Mortgage payments
  • Rent deposits
  • Chattels and leases
  • Bill of sale
  • Factored book debts

It’s important to note that a fixed charge repayment ranks before that of a floating charge repayment in company insolvency.

What is a floating charge?  

It is equally as important to understand what a floating charge is when you are the owner of a business venture within the United Kingdom. 

People often get a little confused when it comes to knowing what the differences between a fixed charge and a floating charge are, as they believe it is because they are physical. However, as you will have now already read, this is not the case.

A floating charge is for the most part seen as more adaptable for the borrowing industry. Floating charges are dynamic – as the name might suggest to you. The charges cover resources like stock, moveable apparatus, and debt holders. They can likewise allude to future resources obtained in the running of a business.

A business may have a sense of safety in acquiring cash against floating charges since such resources can be overseen by the business without moneylender endorsement. Contrastingly, the lender might lean toward a fixed charge choice given the more prominent potential for the worth of such floating resources to vary over a longer amount of time.

Keep in mind that a floating charge can become fixed in certain circumstances, but we will analyse that in greater detail as this article progresses.

Floating charge examples

So, a floating charge can be held over the following:

  • Stock, finished or raw material
  • Work in progress
  • Unfactored debtors
  • Fixtures and fittings
  • Cash
  • Vehicles or assets not subject to fixed charges

But the lender does rank behind some other creditors like wages, and the “prescribed part creditors”. This is where things begin to get complicated.

Crystallisation

A floating charge can be seen to be more flexible than a fixed charge, but once it has crystallised, the company can no longer use the associated assets in the course of trade, and they are effectively frozen.

Both types of charge protect the lender should a business fail, as charge-holders have priority over unsecured creditors in a liquidation distribution. The terms and conditions of a floating charge agreement will specify the conditions under which crystallisation occurs – generally default on a loan repayment, and automatically on company liquidation.

Floating charges essentially ‘float’ above changing assets and only become fixed charges, a process known as ‘crystallisation’, in the following circumstances:

  • The company defaults on the repayment and the lender takes action to recover the debt
  • The company is about to be wound up
  • The company appoints the receiver
  • The company will cease to exist in the future

Recording the terms of a security charge

Terms and conditions of the charge should be set out within a debenture, a document which needs to be registered with Companies House within 21 days before it becomes valid. It is also possible that the charge will have to be registered in other ways, such as with Land Registry if land or property is involved.

Both fixed and floating charge status also depends upon certain documents being filed at Companies House using form MR01 (form LLMR01 for LLPs) within 21 days of the signed agreement. These comes with a cost of £23.

The same requirement to register a debenture applies to floating charges. In fact, banks sometimes take a fixed charge over specific hard assets, as well as a floating charge over general classes of asset, so the entire asset base of a company is included within a single debenture.

Understanding the differences between floating and fixed charges

When analysing the main differences, everything will normally come down to the level of control the charge holder has. Without the lender’s (charge holder’s) approval, a fixed charge cannot be sold or transferred in any way. The difference here is that a floating charge can indeed be managed however the business owners chooses, hence the heightened level of flexibility they have.

Although, when considering something such as insolvency or payment altercations, fixed charges will always come before floating charges and be dealt with first in order of repayment. Try to keep in mind that floating charges can occasionally become fixed themselves, which is also known as becoming crystallised.

When a company is wound up, enters receivership, or becomes insolvent, a floating charge will often become fixed. This will give the lender more control on how the asset is handled before the debts are either recovered or settled.

How do fixed and floating charges relate to insolvency?  

Bankruptcy procedures follow a set example, deciding the request in which creditors are repaid. Leasers holding fixed and floating charges are characterised as secured lenders.

This is something which prioritises them above unsecured funders (whose loaning isn’t attached to a fixed or floating resource) who will have to sit tight for their repayment.

In any case, amongst the fixed loan lenders, fixed charge holders will take need over those holding floating charges. It is worth knowing that the Insolvency Act 1986 lays out the request where reimbursements happen in an organisation bankruptcy situation.

In the event of insolvency

Should your company enter liquidation, there is a designated order when it comes to your outstanding creditors receiving payment. As both fixed and floating charge holders are classed as secured lenders, they will take priority over unsecured creditors who must wait until all other costs and creditors have been paid.

Those holding a fixed charge will be first in line for payment and will receive their money through the sale of the asset they are holding a charge over. For floating charge holders, they must wait until fixed charge holders, preferential creditors (typically employees), and the insolvency practitioner have been paid before they can take a share of the remaining funds.

Fixed charge holders are first in line for repayment and receive the money they are owed from the sale of the asset they hold a fixed charge over.

Floating charge holders must wait until fixed charge holders, preferential creditors such as employees and the insolvency practitioner have received the money they are owed before they are repaid. By that point, there may not be enough funds to repay the debt in full.

Under the Insolvency Act 1986, the hierarchy for repayment in an insolvency situation is:

  • The liquidator’s fees and expenses
  • Secured creditors with a fixed charge
  • Preferential creditors (typically employees with wage arrears)
  • Secured creditors with a floating charge
  • Unsecured creditor

We can advise you through the entire process 

You should spend a considerable amount of time deciding what form of business loan you need. An unsecured business loan will likely be the best fit due to the very nature of your organisation.

The one thing we recommend above all else, is taking the advice of experts within this field. Here at Business Insolvency Helpline, our team has years of experience in guiding companies through the insolvency process and all the extras that are involved along the way.

We can develop a clear breakdown of your obligations as a business owner when it comes to repaying creditors, as well as helping you to further understand the key differences between fixed and floating charges.

If you believe our expert level of help would be beneficial to you and your business venture in any way, please do not hesitate to contact us and receive the advice you need today. Our method of business rescue may just be the thing you need to turn your venture around and begin the start of a successful and prosperous future.

Frequently asked questions

What is a fixed and floating charge over all assets

The floating charge, or a security interest over a fund of changing company assets, allows for more freedom for a business, than the lender. While a fixed charge protects the lender, the floating charge gives more scope for the company to sell, transfer or dispose of their assets, without seeking approval from the bank.

What are fixed and floating charges

A fixed charge is attached to an identifiable asset at creation. Assets can include land, property, machinery, copyright, trademark and much more. The business does not typically sell these fixed assets, and the fixed charge is applied to protect the repayment of the company debt.

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