Fixed Charge vs. Floating Charge: Know the Difference
By Shumaila Saeed || Published on January 23, 2024
A Fixed Charge is a security interest attached to specific assets, while a Floating Charge is a security on a group of assets that change over time, becoming 'fixed' upon a certain event.
Key Differences
A Fixed Charge is linked to specific, identifiable assets like machinery or property. In contrast, a Floating Charge applies to assets as a whole, including those acquired in the future.
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Jan 23, 2024
Fixed Charges are on non-current, tangible assets, restricting their sale or transfer without the charge holder's consent. Floating Charges cover current assets like stock, which can be used, sold, or replaced in the normal course of business.
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A Fixed Charge is created and attached to an asset from the time of its creation. A Floating Charge 'floats' over all assets and becomes 'fixed' upon a triggering event like liquidation or default.
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In the event of liquidation, Fixed Charges generally have priority over Floating Charges. This means fixed charge holders are paid first from the sale of the secured asset.
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Fixed Charges are suitable for assets that aren't expected to change frequently. Floating Charges are ideal for businesses with rapidly changing inventories or assets.
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Comparison Chart
Asset Specificity
Attached to specific, identifiable assets
Covers a group of current, changing assets
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Flexibility
Restricts the sale or use of the asset
Allows normal use and sale of the assets
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Nature of Assets
Typically non-current, tangible assets
Current, circulating assets
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Creation and Conversion
Fixed from creation
Becomes fixed upon a specific event
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Priority in Liquidation
Higher priority in repayment
Lower priority compared to fixed charges
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Fixed Charge and Floating Charge Definitions
Fixed Charge
It restricts sale or transfer of the asset.
Due to the fixed charge, the company couldn't sell their machinery without the lender's permission.
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Floating Charge
Floating Charge is a security on a group of assets.
The retailer used a floating charge on its inventory to secure a loan.
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Fixed Charge
It has priority over floating charges in liquidation.
In liquidation, the fixed charge on the property ensured early repayment to the creditor.
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Floating Charge
Floating Charge becomes 'fixed' upon certain events.
The floating charge crystallized into a fixed charge when the company went into liquidation.
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Fixed Charge
Fixed Charge is ideal for non-current, tangible assets.
The company's factory and land were under a fixed charge as collateral for the loan.
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Floating Charge
Floating Charge has lower priority in liquidation.
In the event of liquidation, the floating charge was subordinate to the fixed charges.
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Fixed Charge
Fixed Charge is attached from the time of its creation.
The fixed charge was placed on the new equipment as soon as it was purchased.
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Floating Charge
It allows business operations to continue normally.
Despite the floating charge, the company continued to trade and sell its stock.
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Fixed Charge
Fixed Charge is a security interest on specific assets.
The company took a loan against a fixed charge on its office building.
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Floating Charge
It covers assets acquired in the future.
The floating charge extended to the new stock acquired by the business.
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Repeatedly Asked Queries
Can a Fixed Charge be on any asset?
A Fixed Charge is typically on tangible, non-current assets like real estate or heavy machinery.
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Jan 23, 2024
Are Floating Charges common in business?
Yes, Floating Charges are common, especially in businesses with rapidly changing assets like retail.
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What happens to a Fixed Charge if the asset is sold?
The asset under a Fixed Charge cannot be sold without the charge holder's consent.
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Which has higher priority, a Fixed or Floating Charge?
A Fixed Charge generally has a higher priority over a Floating Charge in terms of repayment in liquidation.
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Jan 23, 2024
How does a Fixed Charge affect business operations?
A Fixed Charge may restrict the business’s ability to dispose of or use the secured assets freely.
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Can a Fixed Charge be transferred?
A Fixed Charge can be transferred if the loan is paid off or with the lender's consent.
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What is a Fixed Charge?
A Fixed Charge is a security interest attached to specific, identifiable assets as collateral for a loan.
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Jan 23, 2024
How does a Floating Charge become fixed?
A Floating Charge becomes fixed or 'crystallizes' upon certain events, like the company going into liquidation or default.
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Jan 23, 2024
Can a company operate normally under a Floating Charge?
Yes, a company can operate normally under a Floating Charge, using, selling, and replacing assets.
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Is a Fixed Charge suitable for fluctuating assets?
No, a Fixed Charge is not suitable for fluctuating assets; a Floating Charge is more appropriate.
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What types of businesses typically use Floating Charges?
Businesses with high inventory turnover, like retail or manufacturing, often use Floating Charges.
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What is a Floating Charge?
A Floating Charge is a security interest over a pool of changing assets, which becomes fixed upon a specific event like liquidation.
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What is the risk for lenders with Floating Charges?
The risk for lenders with Floating Charges is the lower priority in repayment and variable asset value.
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How is a Fixed Charge established?
A Fixed Charge is established through a legal agreement specifying the particular assets as security.
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Do Floating Charges affect a company’s credit rating?
Floating Charges can affect a company’s credit rating depending on the size and terms of the charge.
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What is the main advantage of a Fixed Charge?
The main advantage of a Fixed Charge is the higher repayment priority it provides to lenders.
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Are Floating Charges secured or unsecured?
Floating Charges are considered secured, though they have lower priority compared to fixed charges.
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Can a business have both Fixed and Floating Charges?
Yes, a business can have both Fixed and Floating Charges on different assets.
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Jan 23, 2024
Can new assets be included under an existing Floating Charge?
Yes, new assets can be included under an existing Floating Charge.
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How does insolvency affect a Floating Charge?
In insolvency, a Floating Charge becomes fixed and is subject to repayment after fixed charges are cleared.
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Jan 23, 2024
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About Author
Written by
Shumaila SaeedShumaila Saeed, an expert content creator with 6 years of experience, specializes in distilling complex topics into easily digestible comparisons, shining a light on the nuances that both inform and educate readers with clarity and accuracy.
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