Difference between Fixed and Floating Charge

Fixed and floating charges are two different terms used in providing a lender with the sort of security over the borrowers assets. However, many people use these terms under the same circumstances. They do not realise that though these terms are related but still they have a clear difference. The collateral assets refer to a loan or mortgage is called fixed charges while floating charges changes periodically for a loan or mortgage in repayment. Though it is the main difference between two terms but there are also slight divergences which makes both terms quite exclusive.

Instructions

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    Fixed charge

    When referring to a loan or mortgage with respect to collateral assets are called fixed charges. For example, overall fixed assets like land and machinery use is considered as fixed charges. Other assets building, shares, intellectual property, patents, trademark and copyrights also fall in fixed charges of some kind that uses these very same fixed assets. In business terms, if a borrower says that he is claiming bankruptcy or defaults on his loan, the bank can make recoveries selling his fixed assets. Most of these fixed assets are then sold off to recover whatever money the lender can to help mitigate the loss. Recovering losses by selling borrowers fixed assets is the last thing banks do. To execute this requirement, a fixed charge is made over fixed charges as well. In this type of situations, the asset cannot be disposed until the total loan repayment has made. In case of disposing assets, the borrower somehow needs proper consent from the lender.

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    Floating charges

    When we talk about loan and mortgage, the value that change periodically are floating charges. Those particular assets which do not have constant value are come under floating charges such as stock inventory. In this type of charge, the borrower reserves the right to dispose the assets on his/her will. For example, selling stock is one of the best examples in floating charges. In normal business activities, a floating charge has the tendency to become fixed charge. It is also a possibility that a floating charge become fixed when the repayment date expires. Many agree that floating charge favours a lot to the debtor. Although it provides great flexibility but still a fixed charge is far better than floating charge due to its greater reliability. In floating charge, smaller firms also have greater chance to borrow funds. On the other hand, floating charge does not favour the bank and they always prefer fixed charge in large business deals.

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