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What is a fixed charge and floating charge on Secured Debt?
Is it true that a fixed charge is secured on specific assets of the company which means that when a company borrows money from the bank and gives some particular asset as a security to the bank such as in case of default the bank will sell that asset to recover the money
While floating charge is secured on all assets of the company which means if we can’t return back the money to the bank in due time, the bank has right to sell all assets to recover its money.
And what is Unsecured Debt?
Is it true that Unsecured debt is a debt which is not secured by any particular asset as a security to the bank & in case of default the bank cannot claim any asset in return of money.
Please correct me if wrong
That is all correct 🙂
Sorry to ask again (I know it is 2 marks question that is going to be asked in the exam about this but I wanted to know the logic of these points that I raise! Hope you don’t mind)
1) Which debts are Secured with Fixed & those which are Floating Charge? Is it true that any debt can be of any type either Secured to Unsecured?
2) And What debts are Unsecured?
3) Is Bank Loan & Payables are Unsecured?
4) How do we know whether the debt is Secured or Unsecured such as Convertible debt is considered Secured or Unsecured (or it depends it could be any of them!)\
Thanks for your time! 🙂
1. It is true but only normally would be long-term debt (and only obviously if it was part of the loan agreement)
2. All debts that are not secured, such as payables.
3. Payables are unsecured. Bank loans might be secured – it depends on what is agreed with the lender.
4. The question would tell you whether or not a debt is secured. None of them are ‘automatically’ secured – it depends on what was agreed.