Fixed vs Floating Charge: Key Differences in Security Interests
A fixed charge locks the lender onto a specific asset (like a warehouse) so the borrower can’t sell or swap it without consent. A floating charge hovers over a shifting pool of assets (like stock or cash) and only settles on them if the borrower defaults.
People muddle them because both secure a loan, yet one feels nailed down while the other drifts. Founders see “floating charge” and picture freedom; bankers see “fixed charge” and picture control.
Key Differences
Fixed charge: named asset, early registration, borrower restricted. Floating charge: general class of assets, late crystallisation, borrower free until default. Priority on insolvency: fixed usually ahead of floating.
Which One Should You Choose?
If you want absolute control over high-value property, demand a fixed charge. If the borrower needs to trade stock daily, accept a floating charge and tighten other covenants to stay protected.
Examples and Daily Life
A mortgage on your house is a fixed charge. The bank’s lien on a shop’s inventory is a floating charge that turns fixed only if the shop goes bust.
Can a single loan use both?
Yes—banks often layer a fixed charge on the building and a floating charge on everything else inside it.
Does floating mean weaker security?
Not necessarily; it’s flexible but ranks lower on insolvency, so lenders may ask for extra guarantees.
Who decides the type?
Negotiation between lender and borrower; stronger borrowers push for floating, risk-averse lenders push for fixed.