What distinguishes a floating charge from a fixed charge?

The distinction between a floating charge and a fixed charge primarily lies in the flexibility of the assets secured and how they operate within a business. A floating charge is designed to secure a fluctuating pool of assets that a company uses in its day-to-day operations, such as inventory or accounts receivable. As the business operates and the nature of these assets changes—new inventory being purchased and old inventory being sold—the floating charge adapts and covers the evolving value of those assets.

In contrast, a fixed charge is imposed on specific, identifiable assets, such as real property or machinery. The assets secured by a fixed charge do not change over time; they remain constant and cannot be freely disposed of by the borrower without the lender's consent.

Understanding this flexibility of the floating charge is crucial, as it provides businesses with the ability to continue normal operations while still satisfying secured creditors. This is particularly important in credit arrangements where the lender wants assurance but also needs to allow the borrower operational flexibility. The other options do not accurately capture this key characteristic of how floating charges operate in comparison to fixed charges.