What Is a Floating Charge?

A floating charge, also referred to as a floating lien, is a form of security interest or lien on a group of assets that are not fixed in quantity or value.

Companies utilize floating charges to secure loans. While traditional loans are often secured by fixed assets like property or equipment, floating charges are backed by dynamic assets, typically current assets that can fluctuate in value.

**Key Points:**
– A floating charge is a type of security interest on assets whose quantity and value are variable.
– It is commonly used by companies to secure loans.
– The assets involved are usually short-term current assets with fluctuating values that the company consumes within a year.

Understanding a Floating Charge

Floating charges provide business owners with the ability to access capital secured by assets that change and flow within the company’s operations. These charges are supported by short-term current assets that the company uses within a year, allowing the company to continue operating using these assets as collateral.

Current assets are assets that can be readily converted into cash and include items like accounts receivable, inventory, and marketable securities. For instance, when inventory is leveraged for a loan, the company can still manage, replenish, and alter the inventory’s quantity and value since it fluctuates over time.

Companies benefit from floating charges as they enable financing operations using assets like inventory.

Crystallization of Floating to Fixed Charges

Crystallization is the process through which a floating charge transitions into a fixed charge. If a company fails to repay a loan, undergoes liquidation, or experiences other specified events, the floating charge becomes fixed, and the assets are blocked from being utilized or sold by the company.

Crystallization may occur when a company ceases operations, with the appointment of a receiver in legal proceedings, making the security fixed. Once crystallized, the assets are non-negotiable, and the lender gains control over them.

Fixed charges are often linked to physical assets such as buildings or equipment. For example, when a company takes out a mortgage on a property, the mortgage is a fixed charge that restricts the company from disposing of the property until the loan conditions are met.

Floating Charge Example

Let’s consider Macy’s Inc., one of the largest U.S. department stores, which has secured a loan using its inventory as collateral. The lender holds a floating charge over the inventory, as outlined in the loan terms.

The balance sheet of Macy’s for the quarter ending November 3, 2018, reveals fluctuations in inventory values, underscoring the dynamic nature of assets secured through floating charges.

Macy’s balance Sheet Nov 3, 2018. Investopedia

• On November 3, 2018, the inventory was valued at $7.147 billion, increasing from $5.178 billion in the prior quarter ending February 3.
• Inventory values vary with each period due to changing quantities and values.
• Assets used as collateral under floating charges fluctuate in their value and quantity.