Updated on: 15th of June 2026
Many companies need to borrow money from lenders or banks to boost their growth and development; to invest in a new location, launch a new product or service, or buy new equipment.
But when a business borrows money, lenders will usually require some form of security before approving finance. This security helps protect the lender if the company later becomes insolvent and cannot repay its debts.
Two of the most common forms of security used in business lending are fixed and floating charges. While both give lenders rights over company assets, they operate in very different ways and can have significant implications if the company enters insolvency proceedings.
Understanding the difference between a fixed and floating charge is important for Company Directors, particularly when assessing finance agreements, managing borrowing, or dealing with insolvency risks. In this guide, we explain how each type of charge works, provide examples of fixed and floating charges, and explore what happens if a company becomes insolvent.
What is a fixed and floating charge?
A fixed and floating charge are both forms of secured lending used by banks and creditors to protect the money they lend to a business. The charge gives the lender legal rights over company assets if the business cannot repay the debt.
The key difference lies in the type of asset covered and how much control the company has over those assets while trading.
- A fixed charge applies to a specific, identifiable asset.
- A floating charge applies to a group of changing business assets.
Both types of charges are commonly included within a debenture agreement, which outlines the lender’s security rights and repayment terms.
Why do lenders use charges?
Lenders use charges to reduce financial risk. If a business fails financially, secured creditors have a greater chance of recovering the money they are owed than unsecured creditors. This is particularly important in Creditors’ Voluntary Insolvency situations where there may not be enough assets to repay everyone in full.
For businesses, secured borrowing can often provide:
- Access to larger loans
- Better interest rates
- Increased funding flexibility.
However, Directors should understand exactly what assets are being used as security before entering into any agreement.
What is a debenture?
A debenture is a legal document detailing the terms of a loan, including the amount borrowed, the interest rate, and the repayment schedule. It also specifies the charges securing the loan and any associated insurance, outlining whether a fixed or floating charge is involved. For a floating charge to be legally valid, the debenture must be officially registered with Companies House.
What is a fixed charge?
A fixed charge is a legal charge attached to a specific asset owned by the company. This means the lender has direct security over that asset, and the company cannot usually sell or dispose of it without the lender’s permission.
If the company defaults on repayments, the lender can take control of the asset and sell it to recover the debt. Fixed charges are typically used for high-value assets that remain relatively stable over time.
Examples of fixed charge
Some of the most common examples of fixed charges include:
- Commercial property
- Land
- Vehicles
- Machinery and equipment
- Mortgages
- Long-term leases.
For example, if a company takes out a mortgage on a commercial building, the lender will usually place a fixed charge over the property. If repayments are not maintained, the lender may repossess and sell the building.
How a fixed charge affects businesses
One of the main characteristics of a fixed charge is the restriction it places on the business.
Because the asset is specifically secured:
- It cannot usually be sold freely
- The lender maintains significant control
- Permission is often required before disposal or transfer.
While this offers stronger protection for lenders, it can reduce the company’s operational flexibility.
For this reason, businesses generally use fixed charges for assets they do not need to trade regularly.
Related: How to Spot the Warning Signs of an Insolvent Company
What is a floating charge?
A floating charge works differently. Instead of attaching to one specific asset, a floating charge applies to a pool of assets that may change over time as the business trades.
This allows the company to continue using, selling, or replacing those assets without seeking permission from the lender. The charge effectively “floats” over the assets until certain trigger events occur.
Examples of floating charges
Common examples of floating charge assets include:
- Stock and inventory
- Cash in business accounts
- Debtors and unpaid invoices
- Raw materials
- Furniture and fittings
- Changing operational assets.
For example, a retailer may have a floating charge over its stock. As products are sold and replaced, the charge automatically adjusts to reflect the changing inventory.
Why floating charges are useful
Floating charges provide businesses with greater flexibility.
Because the company can continue trading its assets normally:
- Stock can be bought and sold
- Cash flow remains operational
- Day-to-day trading can continue uninterrupted.
This makes floating charges particularly useful for businesses with constantly changing assets and stock. Lenders often combine fixed and floating charges within the same lending agreement to maximise protection while allowing the business to operate effectively.
Key differences between fixed and floating charges
| Fixed Charge | Floating Charge | |
|---|---|---|
| Type of assets | Identifiable long-term assets | Changing or circulating assets |
| Control over assets | Lender has control over fixed asset(s) | Business can continue trading assets as usual |
| Flexibility | Restrictive | More flexible |
| Insolvency Priority | Paid first | Paid much later |
What happens during Insolvency?
If a company becomes insolvent, secured creditors are repaid according to a strict legal order. Fixed charge holders are paid first. Assets covered by fixed charges are sold first to repay the secured lender. Floating charge holders are paid much later in the order of hierarchy.
- After fixed charge holders
- After insolvency costs
- After certain preferential creditors.
Only then do floating charge holders receive repayment from remaining assets. This is why lenders often insist on fixed or floating charges before offering substantial finance.
Why Directors should understand charges
Many Directors sign finance agreements without fully understanding how charges affect their business.
This can create problems later, particularly if:
- The company faces insolvency
- Assets need to be sold
- Refinancing is required
- Directors want to restructure the business.
Understanding the difference between fixed and floating charges helps Directors:
- Assess lending risks properly
- Understand creditor rights
- Make informed borrowing decisions
- Prepare for insolvency scenarios if needed.
Common misunderstandings about floating charge
Floating charges are often misunderstood because businesses continue operating normally while the charge exists.
Some Directors incorrectly assume:
- The lender has no real control
- Floating charges are less important
- The charge only matters during liquidation.
In reality, floating charges can have major implications if financial difficulties arise, particularly once crystallisation occurs.
What is crystallisation?
Crystallisation occurs when a floating charge converts into a fixed charge.
This usually happens when:
- The company becomes insolvent
- Loan repayments are breached
- A liquidator or administrator is appointed
- The business stops trading.
Once crystallisation occurs:
- The company loses freedom over the assets
- The lender gains stronger control
- Assets covered by the charge can no longer be freely disposed of.
At this stage, the floating charge operates with the effect of a fixed charge over the specific assets.
Why choose Clarke Bell?
Clarke Bell has been advising Directors on liquidation and insolvency matters since 1994. If you want to know more about charges and how they can impact your business in the event of liquidation, get in touch with the Clarke Bell team today.
Contact us today to arrange a free consultation with one of our experienced advisers.
Frequently asked questions
What is the difference between a fixed and a floating charge?
A fixed charge applies to a specific asset, while a floating charge applies to a changing pool of business assets such as stock or cash flow.
What are examples of fixed charges?
Examples of fixed charges include property, land, machinery, vehicles, and commercial mortgages.
What are examples of floating charges?
Examples of floating charges include stock, inventory, debtors, cash, and operational business assets.
Can a floating charge become fixed?
Yes. This is known as crystallisation and usually occurs when a company becomes insolvent or defaults on repayments.
Who gets paid first in insolvency?
Fixed charge holders are paid before floating charge holders and unsecured creditors.
What is a debenture?
A debenture is the legal document that records the loan agreement and outlines the lender’s security over company assets.
Can a company have both fixed and floating charges?
Yes. Many lenders use both forms of security within the same finance agreement.
