What is a secured creditor?

One way for a business to raise capital is for it to take out a loan, secured against its assets. The party giving the loan is known as the secured creditor.

Often they will be a bank, but there are many private investment firms who also offer this service. As with most large financial transactions, the operation of secured credit can be complex and various regulations must be complied with.

Requirements and operation

Credit is secured by way of a charge against the borrowing company’s assets. This charge entitles the creditor to recover the assets and sell them under certain conditions, usually the company defaulting on its loan repayments.

The security is only valid if the charge is registered with Companies House. The reason for this is that the financial status of a company is important to potential investors or other creditors. Having a large number of charges is not necessarily detrimental, but it can be an early warning sign, especially if the company’s turnover is dropping.

If the charge is not registered, the creditor becomes unsecured. In order to recover the debt in the event of a default, they will need to seek a court order. They will however be given priority in the event that the company becomes insolvent.

Visit our financial law pages to learn more about the regulations governing borrowing.

Types of charge

There are two main types of charges companies can give: fixed charges and floating charges.

A fixed charge over land, buildings and major items of machinery gives the lender the right to be paid out of the proceeds of sale on the insolvency of the business, before other creditors. The borrower cannot sell the assets subject to a fixed charge without first consulting the creditor.

A floating charge is a charge over all the company's assets or a class of the company's assets that are constantly changing so the company retains the freedom to deal with the assets whilst still giving the lender security for their loan.

For example, a car dealership may secure a floating charge on the cars it has in stock. These of course will change over time as new cars are bought and sold.

When a floating charge becomes operational, it is said to ‘crystallise’. This can be disastrous and in some cases this can cause an apparently healthy company to become insolvent overnight. If you are considering securing a loan on your stock, you should be very careful not to risk your business!

You can learn more about this subject by visiting our debt and insolvency pages.

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