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Simple English definitions for legal terms
floating lien
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A quick definition of floating lien:
A floating lien is a way for a business to use its inventory or accounts receivable as collateral for a loan. The lender has a general security interest in the assets, even if they change over time. The business can continue to use the assets as long as they make their loan payments. But if they don't, the lender can take the assets or sell them to make up for their losses. If the business goes bankrupt, the floating lien becomes fixed, and the lender may have to fight with other creditors to get their money back.
A more thorough explanation:
A floating lien is a type of security interest that a business can use to obtain loans. It involves using a group of assets, such as inventory or accounts receivable, as collateral. The assets can change in quantity and value over time, but the lien remains in place to assure the creditor that their loan is secured by valuable assets.
For example, a clothing store may use a floating lien to obtain a loan. The inventory of the store changes with the seasons, but the creditor knows that they can always rely on the value of the inventory as collateral for the loan.
However, if the debtor defaults on payments or triggers another event set out in the loan, the floating lien becomes fixed. This means that the assets become fixed, and the debtor can no longer use the collateral. The creditor can then retrieve missed payments or sell the collateral to make up for losses.
It's important to note that floating liens can become complicated for lenders if the debtor files for bankruptcy. At this point, any floating liens become fixed, and the lender must contend with other lenders and the underleveraged state of the debtor. The lender must make sure to petition during the bankruptcy proceedings to recover the collateral, receive some form of compensation, or negotiate a new lien on assets of the business.