# What is a Floating Charge? Definition, Uses, and an Example

## What Is a Floating Charge?

A floating charge is a dynamic security interest or [lien](https://www.investopedia.com/terms/l/lien.asp) over fluctuating [current assets](https://www.investopedia.com/terms/c/currentassets.asp) like inventory, enabling companies to secure loans while maintaining operational flexibility. It's used to secure [loans](https://www.investopedia.com/terms/l/loan.asp) with assets that are non-constant or fluctuate in value.

A floating charge offers companies the financial flexibility of using their short-term assets to run operations while still securing funding. Crystallization transforms a floating charge into a fixed charge during events like loan default or liquidation, restricting the company's ability to use the assets.

### Key Takeaways

*   A floating charge is a lien on a company's fluctuating assets, securing loans with inventory or receivables.
*   Companies gain financial flexibility by using current assets as collateral while still operating with them.
*   Crystallization occurs when a floating charge converts to a fixed charge, restricting asset use.
*   Macy's used its changing inventory value as collateral for a loan, illustrating a real-world floating charge scenario.

## How Floating Charges Benefit Businesses

Floating charges allow business owners to access [capital](https://www.investopedia.com/terms/c/capital.asp) secured with dynamic or circulating assets. The assets backing a floating charge are short-term and usually used within a year. The floating charge is secured by the current assets while allowing the company to use those assets to run its business operations.

Current assets are those business possessions that the firm can quickly liquidate for cash and include [accounts receivable](https://www.investopedia.com/terms/a/accountsreceivable.asp), inventory, and marketable securities, among other items. If inventory is [collateral](https://www.investopedia.com/terms/c/collateral.asp) for a loan, the company can still sell and restock it. This means the inventory's value and quantity can change over time.

> **Important**
>
> A floating charge is helpful to companies because it allows them to finance their operations by using current assets such as inventory.

## Transitioning from Floating to Fixed Charges: Crystallization Explained

[Crystallization](https://www.investopedia.com/terms/c/crystallization.asp) is the process by which a floating charge converts into a [fixed charge](https://www.investopedia.com/terms/f/fixed-charge.asp). If a company fails to repay or enters liquidation, the floating charge becomes a fixed charge. In a fixed charge, the lender takes control, and the company can't use or sell the assets.  

Crystallization can also happen if a company ends operations or if the borrower and lender go to court and the court appoints a [receiver](https://www.investopedia.com/terms/r/receiver.asp). Once crystallized, the now-fixed-rate security cannot be sold, and the lender may take possession of it.

Fixed charges typically involve tangible assets like buildings or equipment. If a company [mortgages](https://www.investopedia.com/terms/m/mortgage.asp) a building, the mortgage is a fixed charge. The business can't sell the building until the loan is repaid or other conditions are met.

## How Macy's Uses Floating Charges

Macy's Inc. is one of the largest department stores in the U.S. Imagine the company takes a loan using its [inventory](https://www.investopedia.com/terms/i/inventory.asp) as collateral. The lender holds a floating charge over the inventory, as stated in the loan terms.

Here's a snapshot of Macy's [balance sheet](https://www.macysinc.com/investors/sec-filings) for the quarter ending November 3, 2018.

![Macy's balance sheet Nov 3, 2018](https://www.investopedia.com/thmb/s1XBvjGpQYhrt0l5VS3EyKTn290=/950x0/filters:no_upscale():max_bytes(150000):strip_icc()/MacysbalanceSheetNov32018-146bc581861a44528f5802bbde519227.jpg)

*Macy's balance Sheet Nov 3, 2018.*

*   November 3, 2018, the company's inventories, highlighted in green, had a value of $7.147 billion.
*   However, in the previous quarter ending February 3, the value was $5.178 billion.
*   We can see that inventory values fluctuate with each period because the total quantities and values change.
*   The assets being secured for the loan are allowed to float or vary in price and quantity.