You’ve mastered your first mortgage. You can talk LTV and DTI in your sleep. But then a commercial lender slides a document across the table and mentions a “general security agreement with a floating charge.” Your confidence vanishes. What do you do?
Let’s be clear: if you’re just getting a standard mortgage on your personal home or first rental, this doesn’t apply to you… yet. This article is for when you’re ready to make the leap from landlord to business owner. We will demystify the floating charge using a simple analogy, show you exactly when you’ll encounter it, what the real risks are, and how to handle it like a pro. Think of this as your guide to Level 2 of real estate financing.
Table of Contents
What is a Floating Charge?
A floating charge is a type of security a lender takes over a group of changing assets within a business. Unlike a traditional mortgage that is tied to one specific property, a floating charge “floats” over a class of assets, such as a company’s properties, bank accounts, and even future rental income.
To make this simple, let’s use an analogy:
- A fixed charge (like your mortgage) is a heavy-duty bike lock chaining one specific bicycle (e.g., 123 Main Street) to an immovable post. The lender’s claim is only on that single, identifiable bike.
- A floating charge is like a giant fishing net hovering over your entire business bike rack. Your company (your LLC) can freely buy new bikes (properties), sell old ones, and use the cash from operations. The net just “floats” over the whole operation, securing the lender’s interest in the collection of assets as a whole, not just one bike.
| Feature | Fixed Charge (Your Mortgage) | Floating Charge (Business Loan) |
| Covers | ✅ One specific property | ☁️ A group of changing assets |
| Flexibility | ❌ Can’t sell without permission | ✅ Can operate your business freely |
| Encountered | Personal/Residential Loans | Commercial/Business Loans |
When Will You Encounter a Floating Charge?
You will most likely encounter this term when you have formed a business entity (like an LLC or Corporation) and are applying for commercial financing.
This isn’t just for a generic “business loan.” You’re likely to see it when seeking:
- A Business Line of Credit (LOC) to fund renovations across your portfolio.
- A Portfolio Loan that uses several of your properties as collateral.
- A Blanket Mortgage designed to cover multiple real estate assets under one loan.
Real-World Example:
Let’s say your company, “Investor Properties LLC,” wants a $100,000 line of credit for repairs. The bank might secure that loan with a fixed charge on your most valuable property and a floating charge over everything else the LLC owns—its bank accounts, other properties, and future rental income.
The “Oh No” Moment: What is Crystallization?
So what happens if your business defaults on the loan? The floating charge “crystallizes.”
Remember that fishing net hovering over your bike rack? Crystallization is the moment the lender yanks the drawstring tight. The net is no longer floating; it’s locked down, trapping every single asset that was inside it at that moment.
This isn’t just a legal theory. It means your LLC’s bank account could be frozen instantly. You have a tenant’s security deposit in there and a check ready for an emergency plumber? Too bad. You can’t access that cash. The lender now controls those assets. That is the real power—and risk—of crystallization.
Key Takeaway: A floating charge offers your business the flexibility to operate and grow, but it gives the lender a broad claim over all your business assets. If you default, crystallization converts that floating claim into a fixed one, effectively freezing your company’s assets and giving the lender control.
Why Should an Investor Care? The Trade-Off
- The Pro (Flexibility for Growth): A floating charge is what allows your real estate business state business to actually function—to collect rent, pay bills, and manage properties without calling the bank for permission every time.
- The Con (The Ultimate Risk): The trade-off is that the lender has a claim on potentially everything your business owns. The stakes are much higher than a simple foreclosure on a single property.
Your Action Plan: 3 Questions to Ask Your Lawyer
When you see this term in a loan document, don’t panic—get prepared. This is precisely why you have a legal team. Take the loan documents to your real estate attorney and ask these specific questions:
- “What specific assets does this floating charge cover? Can we negotiate to limit its scope?”
- “What are the exact events that trigger crystallization, beyond just missing a payment?”
- “How does this charge rank in priority against other debts if the business faces trouble?”
FAQs: Floating Charge
What’s the difference between a floating charge and a lien?
A lien is a broad term for a legal claim against an asset. A floating charge is a specific type of lien used in business lending that covers a changing group of assets rather than one fixed asset.
Is a floating charge a bad thing?
Not necessarily. It’s a standard tool in commercial finance that enables businesses to get the flexible funding they need to grow. It’s not “bad,” but it carries significant risks that you must understand and respect.
Can I negotiate the terms of a floating charge?
Yes, often you can. An experienced commercial real estate lawyer may be able to negotiate the scope of the charge (e.g., excluding certain assets) or clarify the specific events that trigger crystallization.
Conclusion
Incorporating commercial financing into your real estate strategy is a major step, and the floating charge is a key part of that world. It offers your business vital flexibility in exchange for broader lender security. By understanding what that “net” is, how it works, and how to manage its terms, you’re no longer just a property owner—you’re a sophisticated portfolio builder. Encountering a floating charge is a milestone, proving you’re ready for the next level.
