When you lend money, you want reassurance that you'll get it back. That's what security is for. In the UK, there are several ways to secure a loan against a borrower's assets, each with different strengths and weaknesses. Understanding the difference between a fixed charge, a floating charge, a mortgage, and a guarantee could save you thousands if the borrower defaults.
Fixed charges: the gold standard
A fixed charge is security over a specific asset—land, property, machinery, a vehicle. When you take a fixed charge, you have first claim to sell that asset and recover your loan if the borrower defaults. Fixed charges are registered at Companies House or at HM Land Registry, which is crucial: without it, your charge might not be enforceable.
Fixed charges are ideal for large loans against identifiable, valuable assets. But they're time-consuming to set up and expensive to enforce.
Floating charges: the flexible alternative
A floating charge is security over all of a borrower's assets—or a category of assets, like inventory or receivables. The borrower can use, sell, and replace the assets without your permission. This flexibility is attractive to borrowers, especially businesses that need to sell inventory regularly.
But floating charges come with a catch. If the company goes into administration, any administrator appointed will take priority over your floating charge. Your recovery rate in insolvency is typically much lower.
Personal guarantees: the human element
A personal guarantee is a promise from an individual (usually the company director) to personally repay the loan if the company defaults. Guarantees are crucial for lending to small companies. But guarantees are only as good as the guarantor's personal finances. Always get guarantees in writing, signed by the guarantor.
Getting it right
In practice, lenders often combine multiple forms of security. A bank lending £100,000 to a small company might take a fixed charge over company property, a floating charge over business assets, and a personal guarantee from the director.
Need to review your loan agreement and security provisions? Get started with QuickLegalCheck for a detailed analysis of your loan documentation and risk coverage.