Floating charge

What does a lender hold as security when a business’s main assets are boxes on shelves and invoices waiting to be paid? Usually a floating charge: a claim that hovers over the trading assets as a group, rather than pinning down any single item, so the business can keep selling stock and banking customer payments without asking permission each time.

How a floating charge behaves

The easiest way to picture it is a net held above the business. Underneath, stock arrives and leaves, invoices are raised and paid, and the bank balance rises and falls. The net covers whatever happens to be there, but it doesn’t touch down while things are running normally.

When a trigger event occurs, the net drops. Lawyers call this crystallisation. Common triggers written into security documents include:

• a missed repayment or other default that isn’t fixed
• the company entering voluntary administration, receivership or liquidation
• the business ceasing to trade, or trying to sell most of its assets outside normal trading

From that point, the charge attaches to the specific stock, debts and cash on hand, and the business can no longer deal with them freely.

The modern name: circulating security interest

The PPSA, which started in January 2012, replaced the old vocabulary for personal property. Assets a company can deal with in the ordinary course of business without the lender’s consent, such as inventory and accounts, are circulating assets. Security over them is a circulating security interest, and the Corporations Act treats existing floating charges the same way.

In day-to-day lending, that security is usually created by a general security agreement that reaches everything the company owns now or buys later, registered on the PPSR. One document can create fixed security over some assets and circulating security over the rest. Our fixed charge entry explains the other half.

Already carrying an all-assets registration from a past lender? We can help you plan around it.

Three things that weaken a floating charge

This is where a floating charge differs most from fixed security, and why lenders price it accordingly.

1. Employees come first. If a company is wound up and its unsecured assets can’t cover priority employee entitlements, those entitlements (unpaid wages, super, leave and redundancy) are paid out of circulating assets ahead of the circulating security holder. ASIC’s guidance for employees sets out how these priorities operate.

2. The six-month rule. A circulating security interest granted within six months before a company goes into administration or liquidation can be void against the liquidator, except to the extent the lender handed over new value at or after the time it was given. A floating charge taken late to secure an old debt is vulnerable.

3. Trading can continue under an administrator. An administrator can generally keep dealing with circulating assets in the ordinary course of business, so stock may be sold and debtors collected while the lender waits. Separately, rules introduced in 2018 limit a lender’s ability to enforce some contract rights purely because a company has entered administration or a restructuring.

None of this makes floating security worthless. It means lenders relying on it tend to lend smaller amounts against it, watch turnover closely, and often ask for a director’s guarantee alongside.

A worked example

A Perth homewares wholesaler borrows $300k from a non-bank lender for working capital. Its security is a GSA, giving it circulating security over stock worth about $420k and debtors of around $250k.

Over the next year the business sells and replaces most of that stock several times. None of the sales need the lender’s consent, because the charge is still floating. Then a major retail customer collapses owing $140k, the wholesaler misses two repayments, and the lender’s default notice goes unanswered. Under the terms of the GSA, the charge crystallises over the stock and debtors on hand that day.

If the company later went into liquidation and owed staff $60k in priority entitlements that free assets couldn’t cover, that amount would come out of the stock and debtors before the lender. The lender’s recovery would depend on what was left.

Related terms

• Fixed charge: security tied to specific assets under the lender’s control.
• Security interest: the PPSA’s umbrella term for both.
• Liquidation: the winding-up process where priorities are tested.
• Debtor finance: funding secured on your receivables directly.

When your trading assets are your best security

Plenty of good businesses don’t own a building. If yours runs on stock and receivables, options like debtor finance, a line of credit or an unsecured business loan may be worth weighing up. Our form sticks to the basics; sixty seconds is plenty. There’s no credit enquiry for putting your hand up, and nobody else in the market gets your name from us. A member of our team reads your enquiry and phones to walk through the choices that genuinely suit. True figures for turnover, stock and debtors are what let us point you at a sensible lender straight away.

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