Floating or fixed charges: advantages and disadvantages

Businesses borrowing money from a lender must offer security on their debt in the form of assets defined as fixed or floating charges. There are significant differences between fixed and floating charges which we explain in detail below. Ultimately, it comes down to what kind of asset is being offered as security on a debt, and whether the value of that asset can change over time.

Here’s everything you need to know about fixed and floating charges, and the advantages and disadvantages of both. 

Floating charges

A floating charge is for non-constant assets used by a business during the course of its operations. Rather than securing a loan against specific or fixed assets (such as a building), the term applies to all non-fixed assets owned by the business. It differs from a fixed charge as these assets may change in value or quantity over the course of time, either through usage or by being sold.

 Typical examples of assets used as floating charges include:

• stock

• inventory

Advantages of floating charges

One huge advantage of a floating charge is that the borrowing business can continue its operations as usual without requiring the lender’s consent to use its non-constant assets. A floating charge can also be removed at any time, unlike a fixed charge. One more advantage is that if a business fails, then another business can take control of the non-constant assets.

Disadvantages of floating charges 

Personal liability is one of the biggest disadvantages of a floating charge. If your business fails, you are liable for the debt as soon as you personally receive any money. A floating charge also leaves the door open for fraud by the borrower, should they sell all the tangible assets and simply keep the cash for themselves.

Fixed charges

A fixed charge is for constant or fixed assets that do not fluctuate in value. It is applied to a specific asset owned by a business. Fixed charge liabilities take precedence over floating charge assets in the event of debt recovery.

The lender has full control of a fixed charge, meaning the borrowing business must gain permission to sell the asset before the debt has been settled.

Typical examples of assets used as fixed charges include:

• building or premises

• copyright or intellectual property

Advantages of fixed charges

A fixed charge works well for bigger businesses which have many assets that are constant, such as machinery. Securing a loan with such assets as a fixed charge means the business cannot sell the assets without the lender’s permission. The permission may be easy to gain, especially if the debt is partly or wholly serviced by the sale of the fixed charge asset.

Disadvantages of fixed charges

A fixed charge can seem intimidating because of the restrictions placed on the borrowing business. The assets can technically be sold off to repay the debt and the business has little say in the matter. It should also be noted that financial institutions tend to look down on fixed charge loans.

Fixed or floating charge?

Both floating charges and fixed charges offer different types of protection for your assets, and which is best depends on each individual situation.

A floating charge allows a business to continue conducting its daily operations as usual without requiring permission for certain actions. You can still sell off other assets before fully repaying a debt on a floating charge.

A fixed charge is better suited to protecting one specific asset in case of emergency. Big businesses tend to have a variety of valuable resources, so a fixed charge loan may be the best option in this case.

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