What are Fixed and Floating Charges?

10 April 2014

When a company borrows money, the lender (e.g. bank) usually takes some “security” for that debt as they want to be protected in case the borrower fails to repay debt in the future. If this happens, two types of charges, fixed and floating, can protect the lender.

What is a fixed charge?

The bank may have lent money to the company to acquire an asset like a building or vehicle, for example. The company cannot sell this without the lender’s permission and the debt must be repaid as agreed to in the loan agreement or facility letter.

Like a mortgage, you cannot sell the house without the lender's permission and debt must be repaid in full before you can own your home. This is a type of fixed charge.

A company’s debtor book (including factoring or invoice discounting) can also be a fixed charge. If the bank or factoring company has bought outstanding invoices and lends money against them, then these book debts belong to the lender, not the company.

What is floating charge? 

Where a lender cannot get security in the form of a fixed charge, it will usually take a floating charge against the company’s remaining assets. For example:

Cash

Stock

Work in progress

Unfactored debtors

Fixtures and fittings

Vehicles or assets not subject to fixed charges

It would not be practical to put a fixed charge over every item of stock or desks and chairs so these are left to floating charges.

Read more in our guide to debentures and examples of fixed and floating charges