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Difference between fixed charge and floating charge

The charge refers to the guarantee, provided to insure the debt, by way of mortgage on the company's assets. There are two types of charge, fixed charge and variable charge. The first is a charge on the company's real assets which can be identified and ascertained at the time of the creation of the tax. On the contrary, the latter slightly different, which created on the circulatory heritage in nature, namely the burden not linked to any defined property.

Companies borrow funds from banks, financial institutions and other companies in the form of loans to meet their monetary requirements. The moneylender requires security against the loan and thus, the borrower creates a charge on the assets or pledge on the property. Fixed and floating costs are often discussed in this context. Before you understand charge creation, you should know the difference between two types of charge.

Comparative chart

Basis for comparison Fixed rate Floating charge
SenseThe fixed cost refers to a charge that can be verified with a specific asset during its creation.The floating charge refers to a charge that is created on circulatory activities.
NatureStaticDynamic
Charge recordingvolunteerobligatory
What is it?A legal charge.A fair charge.
PreferenceFirstSecond
Resource typeNon-current assetPatrimonial situation
Manage activitiesThe company does not have the right to deal with the owner, but with some exceptions.The company can use or manage assets until crystallization.

Fixed rate definition

Fixed Charge defined as a privilege or a mortgage created on specific and identifiable fixed assets such as land and buildings, plants and machinery, intangible assets, i.e. trademarks, goodwill, copyright, patent and so on against the loan. The charge covers all those activities that are not normally sold by the company. was created to guarantee debt repayment.

In this type of agreement, the unique feature that after the creation of a position the lender has full control of the collateral asset and that the company (borrower) remains with the possession of the asset. Therefore, if the company wishes to sell, transfer or dispose of the asset, the lender's prior approval must be taken or all quotas must be unloaded first.

Definition of floating charge

The privilege or mortgage that is not specific to any asset of the company known as Floating Charge. The dynamic charge in which the quantity and value of the asset change periodically. used as a mechanism to guarantee the repayment of a loan. It covers assets such as shares, debtors, vehicles not covered by a fixed charge and so on.

In this type of agreement the company (borrower) has the right to sell, transfer or dispose of the asset, in the normal course of business. Therefore, no prior authorization is required from the creditor and there is also no obligation to pay off the shares first.

The conversion of the floating charge into a fixed charge known as crystallization, as a result of which security is no longer floating security. Occurs when:

  • The company is running out.
  • The company ceases to exist in the future.
  • The court appoints the receiver.
  • The company has defaulted on payment and the creditor has taken action against it to recover debts.

Key differences between fixed charge and floating charge

The following are the main differences between the fixed charge and the floating charge:

  1. The charge that can easily be identified with a particular asset known as Fixed Charge. The charge that is created on resources that periodically changes the variable cost.
  2. Fixed charge of a specific nature. Unlike the dynamic floating charge.
  3. Voluntary registration of movable property, in the case of a fixed charge. Conversely, when there is a variable cost, mandatory registration regardless of the type of activity.
  4. The charge sets a legal charge while the floating rate is impartial.
  5. The fixed rate takes precedence over the mobile rate.
  6. The fixed fee covers specific, verifiable and existing assets when creating the fee. On the other hand, the mobile rate covers present or future activities.
  7. When the activity covered by a fixed fee, the company cannot manage the resource until and unless the tax holder agrees. However, in the event of a variable charge, the company can process the asset until the charge is converted to a fixed charge.

Conclusion

The flat fee is created on the asset, regardless of whether they are tangible or intangible. Unlike Floating Charge, which covers the company's current activities, which varies from time to time. In addition, when the borrower defaults in paying the outstanding debt, the floating fee becomes a fixed fee.