Floating Charge
Candlefocus EditorThe main purpose of a floating charge is to allow a lender to immediately draw down funds if the company fails to meet its loan repayment obligations. When a floating charge is created, the lender has a right to the assets of the company that it can seize in the event of default. The floating charge can be converted into a fixed charge if the lender wishes to take more direct control of the assets or if the assets move outside the lender's control.
The assets that can be used in a floating charge are usually short-term current assets, such as inventory and accounts receivable, which the company will likely consume within the next year. This is due to their highly variable nature and the uncertainty regarding their ultimate value. Long-term assets such as plant and machinery, land and buildings, and other fixed assets cannot be used in a floating charge.
A floating charge may also include assets such as intellectual property, patent licenses, goodwill, and trademarks, which are less liquid and difficult to value. The lender specifically identifies each of the assets that they have an interest in and they can only seek repayment based on the value of those assets.
In conclusion, a floating charge is a lien or security interest that may be established over a group of variable assets to secure a loan for a company. It is typically created to allow a lender to quickly draw down the loaned funds in the event the company fails to make timely repayment. Assets used in a floating charge usually include short-term current assets, as well as intellectual property, patent licenses, goodwill, and trademarks. The lender is only able to seek repayment based on the value of the assets in the floating charge.