A Floating Charge is a type of security interest used by lenders to secure a loan or credit facility, typically against a company’s fluctuating or movable assets. In the Indian context, this charge covers assets like stock-in-trade, raw materials, receivables, and cash — assets that change in value and form during regular business operations.
Unlike a fixed charge, which is tied to specific and identifiable assets (like land or machinery), a floating charge “floats” over a pool of changing assets until a certain event — such as loan default, insolvency, or liquidation — causes it to crystallize. Once crystallized, the floating charge becomes a fixed charge, locking onto the existing assets and giving the lender priority in repayment.
Floating charges are widely used in business loans, especially in sectors like trading, manufacturing, or services where assets are not static. This form of charge allows companies to continue using their assets in the normal course of business while still providing a level of security to lenders.
In India, registering a floating charge with the Ministry of Corporate Affairs (MCA) is mandatory under the Companies Act, 2013. Failure to register may result in the charge being considered invalid against liquidators or other creditors. Business owners must also disclose such charges in financial statements and compliance filings.
For startups and growing businesses, understanding the nature of a floating charge is essential during funding rounds or when applying for working capital loans. It strikes a balance between operational flexibility and lender security — making it a commonly accepted financial instrument in the Indian credit ecosystem.
A deeper understanding of the floating charge can help in negotiating better terms with banks or financial institutions, especially when offering collateral over movable assets.