Companies seeking loans from banks usually receive them in exchange for collateral of property and assets, such as company cars or any other properties. Businessman Eitan Eldar notes that due to this, the company cannot sell the charged property until it repays its loan to the bank. And yet, there are quite a few companies whose only options for collateral are inventory that is sold and renewed regularly. In such situations, a company can ask the bank for a floating charge, which applies for all its assets.
Characteristics of a floating charge and its significance
Eitan Eldar explains that a floating charge does not affect the managing of the company and enables it to regularly trade any assets. It is only exercised in the event of an inability to repay obligations. This type of charge may only occur under unique cases and requires a signature from the Registrar of Companies on the bond and charge forms.
What does a floating charge include?
A floating charge includes all company assets including inventory, securities, goodwill, equipment and capital, and, on occasion, charged assets included in the bank. These bonds also specify the conditions for which the bank may sue the company’s assets in receivership, explains Eitan Eldar.
The disadvantages of a floating charge
Eitan Eldar claims that signing a floating charge causes the company to create additional charges with other banks, including regular charges. Charge registration with the Register of Companies will deter any other bank from considering a, once they notice the existence of a floating charge. Therefore, the lending bank receives almost complete control over the company. This full control is also reflected within the bank’s authority to determine in a fast and short process when to expropriate the company’s assets, and the company’s minimal ability to appeal such actions.
In addition, emphasizes Eitan Eldar, in the event of company liquidation, a bank with the floating charge on the assets will have priority over other creditors.