How floating charges are assessed

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Floating charge loans are secured by assets that have no fixed worth. An example of a floating charge is a corporate debenture which is an asset secured loan. Moreover, the assets that can be used to secure a debenture can include stocks, depreciable equipment and goodwill. No specific asset must be used to secure a floating charge, however the value of business assets should be high enough to pay for the loan if liquidated. 

In order for floating charge business loans to be redeemed by the lender either the loan is paid back by the borrower or in the case of default, the lender can appropriate assets owned by the borrowing company. This right of acquisition allows the secured assets to become what is referred to as 'crystalized' to exchange the debt from the loan according to the North Carolina Banking Institute. In other words, the crystallization of secured assets in a floating charge means the loan becomes a fixed charge loan due to non-payment under the conditions of the floating charge.

The reasons why floating charge loans have a transformative structure is due to the terms of agreement. Moreover, also per the North Carolina Banking Institute, although these types of loans are secured, the asset securities remain in the borrower's possession. The lender only has limited rights to the assets allowing the debtor company the freedom to do as it pleases with the assets so long as the loan is paid in accordance with the floating rate charge. Moreover, upon liquidation of assets, floating charge loans are subordinate to fixed charge and loans where control of assets rests with the lender.

Legal definitions of floating charge loans are shaped in part by judicial rulings; consequently they can have similarities and differences across national jurisdictions. Right to assets is an example of a similarity between legal definition of floating charge loans in both the United States and the United Kingdom. Moreover, under normal business conditions floating charge business loans do not require the borrower to obtain consent of the lender before selling secured assets. 

An area of meaning where a difference between the definition of floating charge loans is in how clearly the underlying assets are defined. For example, according to Freshfields Bruckhaus Deringer LLP, in the United Kingdom floating charge assets have legal precedence requiring them to be tangible via control and possession under Financial Collateral Arrangements Regulations. However, In the United States intangible assets are more likely to be considered as acceptable within a floating charge loan depending on how clearly the definition of an asset with changing value is defined.

Even though floating charge loans are secured and give lenders the right to assets and cash from sale of those assets, they are higher risk than secured loans where assets change hands. Moreover, since the floating charge loan is structured differently, it gives the lender lower priority over assets in the event of a company liquidation per the North Carolina Banking Institute. For this reason, when making floating charge loans, the ability of a borrower to remain solvent is significantly associated with the risk of that loan.