When it comes to finances, it is important to have a good understanding of the different terms. This will help you to have a better understanding of different charges and why they occur. The last thing you will want to happen is to experience charges you are unsure of.
In this article, we will be discussing floating liens and their meaning. We will also be discussing their importance, and how they differ from fixed charges. We hope this article will help to educate you on how you can gain loans for your company.
What A Lien Means?
The word lien can seem quite confusing if it is a term you are not familiar with. However, it is fairly easy to understand. Essentially a lien is a legal claim and right that a lender has over specific assets owned by a company.
This agreed lien can then be used as collateral if a company were not to pay back their loan repayments according to the contract and agreement that was made.
What Is A Floating Lien?
A floating lien can often be called a floating charge, and both of these aspects are the same. Essentially a floating lien is a way in which a company can gain a loan to use. They are important and useful, especially if you are unable to access a fixed assets loan.
The loan is secured through the use of security interest in general assets. These assets are individual, and are instead used as collateral. However, they do not need to be specifically identified.
Instead, the assets used can be current, and do have the potential to change in value over time. It can also be based on asset class too. Some examples of floating liens could be inventory, receivables, and different items that have the potential to change in value.
While it is not a typical type of loan, it is a useful option to consider. If you are worried about your fixed assets, this is a way of protecting them and preventing them from being used to gain a loan.
Why Is A Floating Lien Important?
There is certainly a place for floating liens, and they are important to consider. They are particularly useful for businesses that are looking to protect their fixed assets. Using these as collateral when applying or accepting a loan is certainly risky, and something that not every business feels happy or confident doing.
While the assets can change in value, this doesn’t affect your borrowing rights, which is important to remember, as some people may assume that it does. The assets that are being used in the floating lien can still be used or changed, which is particularly useful for businesses. The lien can be transferred if needed too.
The assets can be increased, decreased or even sold without this affecting the floating lien or charges. Cash can be used in this instance, if you are not looking to use fixed assets.
Who Can Give A Floating Charge?
It is important to note that it is only companies that can receive a floating charge, this cannot be used for personal purposes. When you take into consideration what is involved with a floating lien, this is understandable given the collateral used.
There needs to be company assets involved, whether or not past, current or future assets are being used. In addition to this, the assets need to be linked and registered to the company in order for them to be used.
This needs to be proved, and linked to the Companies House. There needs to be a Land Registry present to prove that the assets belong to a company, rather than to a specific person.
This type of loan cannot be given out by all lenders. Typically, it is banks that are able to accept and carry out these types of loans. In addition to this, you may find that floating charges are used in addition to fixed assets. Over time, many floating charges are changed to fixed assets because this is a more secure type of loan that is preferred by lenders.
What Is The Difference Between Fixed And Floating Charge?
This is something we have already touched upon slightly. The biggest difference between a fixed and floating charge is the type of assets that are used in the loan agreement.
In general, fixed assets are typically used as collateral as these are the most reliable types of assets. A fixed asset is linked to specific items, and assets, and this is what will be directly used as collateral if the loan payments are not repaid correctly. They are more secure as they are fixed and cannot be changed in any way during the agreement.
While fixed charges are better for a lender because it provides them with more security, it is not always the best option for businesses as it does somewhat tie them down. This is why some companies choose to use a floating lien instead.
Floating liens do not have to be tied to specific assets and are a blanket charge where the assets can be used or changed over time. They certainly give a company more freedom on the whole, and take away the pressure of a fixed charge.
However, as it doesn’t protect the lender, many will aim to change the floating charges after some time.
We hope you have found this article useful. As you can see, a floating lean and floating charge is fairly easy to understand. While it doesn’t protect the lender in the same way as a fixed asset loan would, it allows companies to have more freedom with what assets are used. It can take away the pressure of using fixed assets, and it is a useful option to consider.
However, it can only be used by companies, and there are a number of rules and regulations that surround it. In order to be accepted for a floating lien, you will need to meet these regulations.