A floating lien is a security interest in a group of assets owned by a business that change in quantity and value through the course of business. Floating liens allow a business to obtain loans and provide as the collateral a general security interest in its inventory or accounts receivable. The actual items of property can change over time (e.g., an inventory full of winter boots may become an inventory full of summer sandals), but a floating lien continues to assure the creditor that its loan is secured by valuable assets. The creditor will typically be paid periodically on the loan, such as monthly or quarterly, and as long as the payments are made, the debtor can continue using the assets subject to the floating lien. However, if the debtor ever defaults on payments or triggers another event setout in the loan, the floating lien crystallizes, meaning that the assets become fixed, and the debtor can no longer use the collateral. This ensures that the creditor can either retrieve missed payments or sell the collateral to make up for losses.
Floating liens can become complicated for lenders in the case that a debtor files for bankruptcy. Immediately after filing for bankruptcy, any floating liens would become fixed. At this point, the lender of the floating lien will have to contend with other lenders and the underleveraged state of the debtor. Unless another lender has a specific claim to the collateral, the floating lien will generally have highest priority over those assets. However, given that the lien becomes fixed upon filing, the debtor may begin to sell the collateral after bankruptcy has occurred in carrying on business. Thus, a 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.
[Last updated in December of 2022 by the Wex Definitions Team]