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Fixed and floating charges - Essay Example

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In a bid to acquire that debt, organizations either procure debt from banks or from capital markets in the form of bond issues or equity issues…
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Fixed and floating charges
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Download file to see previous pages However, on the other hand, companies often tend to offer such collaterals in order to gain relaxations in obtaining debt including reduction in the interest rates as well as margin requirements. Thus providing a security not only has a legal implication but also offer influence to creditors in controlling the future events. However, from the perspective of a firm, the nature and impact of providing assets of the firm as security carry different significance and as such depends largely upon the credit worthiness of the firm. Better a firm has a creditworthiness chances are that the firm will be able to get larger concessions in providing assets as security.2
It is however critical to note that from legal perspectives, the claim or charge of creditors on the assets of the company are created through different charges created over the assets of the firm with relevant regulatory authorities. These charges can be of either floating nature or of fixed nature depending upon the nature of the mutual agreement between both the parties. It is however also important to understand that the significance of floating and fixed charge to both creditors and the firm may be different again depending upon the nature of agreement made between both the parties.
There are generally two sources of funds for an organization i.e. equity contribution made by the shareholders of the firm and the funds acquired from external sources such as bank loans and bond issues. Equity issues or equity contribution is the most risky investment because it is clean i.e. shareholders are offered no guarantee or security that their investment will be paid back and as such shareholders have the least claims against the assets of the company in case of its liquidation because all the claims of company’s creditors are settled first and remaining is distributed to the shareholders.
On the other hand, debts obtained from various sources such as banks and capital markets are less risky as compared to ...Download file to see next pagesRead More
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