Fixed and floating charges: what’s the difference?

As a business owner, there are many things that you need to be aware of. When it comes to finances, it’s crucial that you stay on top of what’s expected of you. You might come across fixed and floating charges. In this blog, we’re letting you know about the differences between fixed and floating charges.

What is a fixed charge?

Fixed charges are only used against tangible assets. These can include items such as the following.

• Mortgage payments
• Rentals
• Bank loans
• Property
• Machinery and equipment

When a fixed charge is active, these assets can be sold to generate money if the company is struggling to pay the lender back. It’s not uncommon for businesses to struggle with money from time to time. However, it becomes a problem when you cannot afford to pay your debts when they fall due.

In some cases, these financial problems may be relatively easy to solve. For example, you may be waiting for a larger client to pay you for your services.

It’s very important that you seek professional advice if you begin struggling to pay back your creditors. Not acting promptly will only cause the situation to get worse.

What is a floating charge?

In addition to fixed charges, you can also have floating charges. These are similar in that they are used on assets but are more flexible. When a floating charge is active, it can change over time with the business and its other assets.

Due to their flexibility, floating charges are best placed on assets such as cash, stocks, debtors and inventory items.

What’s the difference between a fixed and floating charge?

Generally, a fixed charge is seen in higher regard than a floating charge. This means that if your business became insolvent, these fixed charges would be more important. An insolvent company is one that cannot afford to pay its debts when they fall due or its liabilities are worth more than its assets.

Fixed charges are usually placed on physical assets within a business. In contrast, a floating charge would allow for more flexibility and apply to the whole business.

Due to floating charges having more flexibility, they can change over time. This is because it would be unreasonable to expect that cash and stock would not change over time. However, floating charges can become fixed if they are ‘crystallised’. We will let you know more about the crystallisation of such assets later in the blog.

When it comes to fixed assets, they cannot be sold or disposed of by the business in question. If you do need to sell these assets, you cannot do so without the permission of the fixed charge holder. You should ensure that all paperwork is completed correctly to ensure that you are covered.

Additionally, paperwork should be correct for all types of creditors, which can include the following.

• Secured creditors
• Unsecured creditors
• Fixed charge holders
• Floating charge holders

You may also have heard of preference payments and preferential creditors. It’s best to avoid having preferential creditors, as they can lead to more problems for the borrowing company.

Limited companies must be closed through a formal process, such as liquidation. Under the Insolvency Act, the correct insolvency proceedings are a requirement. Then, with the assistance of an Insolvency Practitioner, the company will be removed from the Companies House register.

When would a floating charge become crystallised?

Floating charges can become ‘crystallised’ if the company enters liquidation or cannot afford to pay its debts back. The process of crystallisation involves the floating charge becoming a fixed charge. This would involve the company’s assets becoming fixed assets, meaning they cannot be sold or disposed of without the lender’s permission.

What are the advantages and disadvantages of fixed charge and floating charge?

Fixed charge advantages

Fixed charges are generally more useful for larger, more established companies, as they tend to have more assets, which are often more costly. A bigger company would not have to worry as much about having less control over its assets and what it can do with them.

Fixed charge disadvantages

When it comes to fixed charges, you must also be aware of the disadvantages. Generally, as a business owner, you will lose a lot of control when using assets in a fixed charge process. You also have to be ready to accept that these assets will be sold if your company cannot afford to pay its creditors on time.

Floating charge advantages

When it comes to floating charges, the business has a lot more flexibility and control. Floating charges allow for more business as usual, making life easier for company directors. Floating charges can also be lifted at any time.

Floating charge disadvantages

Floating charge assets are, unfortunately, open to some discrepancies depending on the actions of the director. Some directors decide to sell their floating assets and keep the money. This is not a good idea, and it will be considered fraud.

Floating charges can also lead to personal liability for the director if the business begins to fail. It’s very important that you seek financial advice if you become worried about cash flow and personal liability within your company.

Fixed and floating charge vs debenture

A debenture is an umbrella term for fixed and floating charges. It refers to the legal documentation that covers directors and lenders for these asset charges.

All debentures must be completed correctly to ensure that you are covered. These act as a security for all parties involved in the process.

At 1st Business Rescue, we are here to help with all aspects of your business. If you are worried about cash flow or insolvency, please don’t hesitate to get in contact with us. We are more than happy to offer professional, confidential advice. Are you looking for advice on fixed or floating charges for your company assets? We can help.

On October 31, 2023   /   Business Advice, Useful Information