Charges are a type of security interest frequently used by businesses that have changing inventory and need funding. In common with other security interests such as mortgages and liens, charges allow a business to obtain credit while using the items pledged as security in the business. A security is an item or group of items promised as a guarantee that a loan will be repaid or an undertaking completed. Generally the person who takes out the loan promises that if he defaults, he will give up the item or items promised as security.
There are two types of charges: floating and fixed. Floating charges have as security a pool of changing assets. For example, a business could obtain a floating charge using its inventory of products as the security. Because the inventory is constantly changing as customers purchase products and the company replaces the used stock, there are no exact items that constitute the security. Instead, the security is “floating”.
If a business with a floating charge defaults on its obligation to pay back the loan or goes into liquidation, the floating charge becomes “crystallized” or frozen. In other words, the assets that are the security become exact. The lender can then take possession of these exact assets in satisfaction of the charge. The business cannot sell the assets and must hold them for the lender. The document describing the floating charge may specify other conditions when the charge becomes crystallized.
In contrast, fixed charges have a definite item or group of items as security for a loan. These items can be tangible or intangible. Examples of items used as security could include a building, equipment or machinery, patents, or trademarks. Unlike inventory that is constantly changing, these items are definite or “fixed”.
To find out more about the types of security on assets, visit Gonsalves-Sabola Chambers online or call the office at +1 242 326 6400.