Fixed vs Floating Charges: Practical Funding Examples

Raising funds for your business is a big milestone – whether you're seeking a bank loan, enticing investors, or looking for alternate financing. But what many business owners don't realise is that lenders often want more than just a good idea and a promising financial forecast. They want security – a legal interest over your business’ assets, ensuring they get paid back if things go wrong. That’s where fixed and floating charges come into the picture. They’re two of the most common ways lenders protect themselves in the UK, but understanding how they work (and how they could impact your business) is essential if you’re seeking finance. In this guide, we'll break down what fixed and floating charges actually mean, explore practical examples, and help you avoid common pitfalls when negotiating your next loan or investor agreement. If you’re ready to get your legal and funding foundations right from the start – keep reading to find out how. Note: This article is for general knowledge only. Sprintlaw can help with legal business matters, but we don’t provide financial or lending advice.

What Are Fixed And Floating Charges?

Fixed Charges Explained

A fixed charge is a type of security a lender takes over a business asset that’s specific, identifiable, and not supposed to change frequently. If you give a lender a fixed charge, you can’t sell or swap that asset without their permission. It essentially “locks down” the asset for the lender’s security. This provides strong protection for the lender, but it also means you lose flexibility over that asset.

• Examples of fixed charges include: property, heavy machinery, company vehicles, or shares in a subsidiary business.
• This is most often used for assets not typically traded or replaced as part of normal business activities.
• If your business defaults, the lender can take and sell these assets first, ahead of most other creditors.

Floating Charges Explained

A floating charge is more flexible. It covers a broad category of assets that typically move or fluctuate as part of daily business – like stock, raw materials, accounts receivable, or even your business bank account balance. The business is allowed to use, sell, or replace these assets freely until certain events (like a default) happen. Only then does the charge “crystallise” and lock down the assets.

• Examples of floating charges include: inventory, debtor book (accounts receivable), fluctuating cash, and sometimes company-wide assets like intellectual property or future stock.
• The business can continue operating and dealing with these assets as normal, unless or until a certain event (default or insolvency) triggers the lender's rights.

Still a bit foggy? Not to worry – we’ll break down some practical scenarios below to make these concepts clear.

Why Do Lenders Use Fixed And Floating Charges?

When a business borrows money, lenders want certainty that they can be repaid – even if the business hits a financial rough patch. Charges are a legal way to prioritise the lender’s claim over some (or all) of the business’s assets ahead of other creditors, should the company fail or enter insolvency. Fixed charges offer the most security to a lender for specific, high-value, and stable assets. Floating charges allow the business to keep operating flexibly but still give the lender a safety net if things go wrong. These charges are almost always formally documented, registered with Companies House, and disclosed to future lenders or buyers (you can read more about essential legal steps for businesses).

Examples Of Fixed And Floating Charges In Business Funding

To truly understand fixed and floating charges, it helps to look at real-life examples of how they’re used in funding deals.

Example 1: Fixed Charge Over Property

Imagine your business is seeking a £200,000 loan to purchase a warehouse. The lender offers the funding, but only if you agree to a fixed charge over the warehouse. This means that until the loan is repaid, you cannot sell, lease, or otherwise dispose of the property without the lender’s explicit permission. If you default on your loan, the lender can repossess and sell the warehouse to recover their money.

• This is a classic example of a fixed charge, and it’s commonly used in commercial property deals and asset-backed lending.

Example 2: Fixed Charge Over Specific Equipment

Suppose your engineering business needs specialist machinery worth £50,000. The bank agrees to lend you the funds, but wants a fixed charge over the named machines. You can’t sell or transfer them, and if you default, the bank can claim and sell those exact items.

• This protects the lender while giving you the equipment you need to grow.

Example 3: Floating Charge Over Stock And Receivables

Say your retail business needs a £100,000 working capital facility – mainly to buy more inventory and cover operating expenses. The lender realises that your stock rotates constantly, and your cash flows up and down with sales. So, they take a floating charge over your “circulating assets” (stock, cash, and unpaid invoices). You’re free to buy, sell, and trade goods as normal. But if you default, the floating charge “crystallises” – and suddenly the lender has a legal claim to whatever stock, cash, and unpaid invoices remain at that point.

• This structure helps you operate and grow, while protecting the bank from being left empty-handed.
• You can find more about trading assets and security arrangements in our guide to business legal compliance.

Example 4: Fixed And Floating Charges Combined

Most modern business loans include a mix of both fixed and floating charges. For example, let’s say your manufacturing company secures a facility from the bank:

• Fixed charge over the factory buildings, company vehicles, and key pieces of equipment (assets that are stable and high value).
• Floating charge over your stock, raw materials, and trade receivables (assets that change regularly).

This hybrid approach maximises the bank’s security, while allowing the business to continue operating. It also means that, in the event of default, the lender will usually claim the fixed-charge assets first, before moving on to the floating-charge assets if there’s any shortfall. If you want more detail about what assets can be included or excluded, it’s a smart idea to have a lawyer review your loan agreement.

Example 5: Fixed Charge Over Shares

Thinking beyond physical assets, another increasingly common scenario is a fixed charge over shares. For example, you might borrow money to fund a company expansion and give the lender a fixed charge over shares you hold in a subsidiary or investment. Until the loan is paid, you can't sell or transfer those shares. If you default, the lender could take ownership of (and sell) the shares to recover their funds.

• This is known as a “charge on shares” and is used in both group companies and some start-up financings.
• Want to know more about how to structure company ownership? Read our guide to setting up a company.

What Happens If Your Business Defaults?

If a business can’t keep up with its loan repayments, lenders with charges have special rights. Here’s how it usually works:

• Fixed charge assets: The lender can rapidly seize and sell the named asset (like property, machinery, or shares) to recoup losses – often ahead of other creditors.
• Floating charge assets: If you default or the company enters insolvency, the floating charge “crystallises.” From that point, the lender can take control of those assets (e.g., remaining stock, cash) but must typically stand behind certain preferential creditors (like employee wage claims) in terms of repayment priority.

It’s vital to understand that granting a charge limits your flexibility but is often a necessary step to secure funding. Always consult a legal professional before signing a loan with charges attached.

Key Legal Documents For Fixed And Floating Charges

If you intend to borrow using business assets as security, you’ll likely encounter some of these important legal documents:

• Debenture: The main document that sets out the lender’s rights over your company’s assets (covering both fixed and floating charges).
• Charge registration forms: Most charges must be registered at Companies House within 21 days, or they may not be valid against other creditors.
• Facility agreement: The detailed loan contract between you and the lender, often outlining exactly which assets are subject to which charges.
• Directors’ personal guarantees: Sometimes, directors are required to guarantee repayment in case company assets aren’t enough.

It's crucial these documents are drafted or reviewed by qualified lawyers who understand your business needs – DIY or template agreements often lack the bespoke protection required. Sprintlaw’s contract drafting and contract review services are designed precisely for this purpose.

What Are The Risks Of Granting Fixed Or Floating Charges?

While these charges are foundational to many business loans, they do involve trade-offs and risks:

• Loss of flexibility: Fixed charges stop you from dealing freely with the charged asset – you can’t sell or replace it without the lender’s OK.
• Priority of repayment: Charges put certain creditors at the front of the repayment queue if your business becomes insolvent.
• Negative signals to future lenders and buyers: Other banks, suppliers, or acquirers will see your charges at Companies House and may be wary of lending more, in case there are no “unencumbered” assets left.
• Ongoing compliance: You may have to report asset changes (such as asset sales) to your lender and get consents for even routine actions.

That's why we always recommend balancing your need for finance with a clear understanding of the legal and commercial impacts of “charging” your assets. If you're raising capital and need guidance, our capital raising consultation can help you navigate your options.

How Can You Protect Your Business?

Here are some practical tips for managing fixed and floating charges in your funding arrangements:

• Understand exactly which assets are being charged before you sign – don’t assume it’s only “the business” generally.
• Limit the scope of charges where possible (e.g., ask for a charge over just one property, not all assets).
• Check whether your facility agreement allows for releasing assets once the debt is reduced (“partial releases”).
• Make sure you’re clear about your reporting and consent obligations under the charge.
• If you’re considering giving a personal guarantee, be absolutely certain you understand the risks to your own assets.
• Always seek legal advice to make sure your interests are properly protected and all documents are compliant and enforceable.

Got more questions about protecting your assets? Read our guide to personal asset protection.

Key Takeaways

• Fixed and floating charges are vital tools for securing business loans in the UK.
• Fixed charges apply to specific assets – like property, equipment, or shares – and restrict your ability to deal with them without the lender’s OK.
• Floating charges cover changeable assets, such as stock and receivables, letting you operate normally until a default “crystallises” the charge.
• Combining fixed and floating charges is common for larger or more complex financing deals.
• Defaulting on a loan with charges allows the lender to seize and sell the charged assets, generally prioritising fixed over floating charges.
• Granting charges involves legal and commercial risks: loss of asset flexibility, impact on your credit profile, and the need for tailored agreements and advice.
• Always get expert legal support before negotiating or agreeing to any fixed or floating charge – it will pay off in long-term protection and confidence.

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If you’d like tailored advice or help drafting and reviewing security agreements for your next funding round, our legal team is here to help. Reach out for a free, no-obligations chat at 08081347754 or team@sprintlaw.co.uk.