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What are floating charges and what do they mean to your business
The term "floating charges" is a little misleading at least in the way that we think of "charge" in the United States.While the floating charges do indeed float, they are not really what we think of as charges.In the United States, floating charges would be more appropriately named "floating security interests".They are securities or insurances that cover all of the assets of a company.As the value of the assets changes through fluctuations in the market, appreciation, depreciation, buying or selling, or anything else, so does the value of the floating charge.Whatever the value of the "fixed assets" of the company, the amount of protection or insurance matches that amount.
The great thing about floating charges is that you can secure your company through your assets and then sell or use the assets.There is no penalty for this, at least not on paper.For example, if you receive a loan for $100,000 using $100,000 of stock as a floating charge to secure the loan, you are still free to sell the stock.The outcome of this situation is that the charger is free to deal with assets as if they weren't secured (for example, the charger doesn't need the creditors consent to buy or sell assets) but still has the advantage of full security of the assets.This offers business owners a lot of freedom at least more freedom that a typical collateral situation offers. The disadvantage of the floating charge is that is that it can be a bad deal for lenders.Whether or not floating charges are going to be good for your business will be primarily dictated by whether your company is in the business as a creditor or a charger.The floating change primarily benefits the charger.The problem with lending money on a floating charge is that it offers no priority for payment in situations such as bankruptcy.For this reason, floating charges are classified at unsecured charges.Almost all other creditors will have priority before the floating charge in the event of bankruptcy. |
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