Floating charge

In plain terms

A floating charge secures a lender against assets that are constantly moving — stock that's bought and sold, cash that flows in and out, debtors that change every day. Rather than pinning down one specific item, it hovers over the whole category, letting you trade normally without asking permission each time you sell stock or bank a payment.

That freedom is the point. A growing business can't run if every sale needs the lender's sign-off. The floating charge gives the lender security over the value of the pool while leaving you free to operate. The catch comes if things go wrong.

Crystallisation

A floating charge changes character the moment something goes wrong. If you default, breach a covenant, or the company heads into insolvency, the charge crystallises — it converts into a fixed charge over whatever assets are in the pool at that instant.

From that point you lose the freedom to deal with those assets, and the lender can step in to recover what it's owed. Crystallisation effectively freezes the pool and turns a flexible security into a firm one. The triggers are set out in the charge document, so it's worth knowing exactly what would set it off before you sign.

Why it matters to your business

A floating charge lets you raise finance against assets you couldn't easily pledge individually — you can't take a fixed charge over stock that turns over weekly. That makes it a practical way to unlock borrowing for asset-rich, property-light businesses such as wholesalers and manufacturers.

But priority matters. On insolvency, floating-charge holders are paid after fixed-charge holders and after preferential creditors such as employees and certain HMRC debts, and a slice is ring-fenced for unsecured creditors. So a floating charge offers the lender less protection than a fixed one — which is why it often sits alongside a fixed charge inside a single debenture.

Floating charge in practice

A typical scenario: a distributor borrows £150,000 secured by a debenture containing a floating charge over its stock and debtors. Day to day, it buys and sells inventory and collects from customers without restriction.

If the business later defaults, the charge crystallises over whatever stock and unpaid invoices exist at that moment, and the lender can realise them to recover the debt. Understanding this helps directors see why lenders price floating-charge lending to reflect its weaker recovery position — and why an unsecured route can be cleaner for short-term needs that don't warrant a charge at all.