Legal Definitions - floating lien

A floating lien is a type of security interest that a creditor holds over a debtor's assets, where the specific assets covered by the lien are not fixed but change over time. Instead of attaching to individual, static items, a floating lien "floats" over a dynamic group of assets, such as a business's inventory, raw materials, or accounts receivable. This arrangement allows a business to use a constantly changing pool of assets as collateral to secure a loan, providing flexibility for its operations. The creditor's security remains valid even as old assets are sold or used and new ones are acquired.

If the debtor fails to meet the loan terms (defaults), the floating lien "crystallizes" or "fixes" on the specific assets present at that moment, giving the creditor a claim to those particular items to recover the outstanding debt.

• Example 1: A Grocery Store's Stock
  A local grocery store, "Fresh Foods Market," secures a business loan from a bank. The bank takes a floating lien on Fresh Foods Market's entire inventory. This means the lien isn't on specific pallets of milk or boxes of cereal, but on the total value of all goods held for sale. As customers buy produce, dairy, and packaged goods, and new shipments arrive daily, the specific items making up the inventory constantly change. However, the bank's security interest remains valid over the ever-evolving stock of goods. If Fresh Foods Market were to default on its loan, the bank's lien would immediately attach to whatever inventory was present in the store at that exact moment.
• Example 2: A Furniture Manufacturer's Raw Materials and Work-in-Progress
  "Crafted Woodworks," a furniture manufacturing company, obtains a line of credit to manage its production costs. The lender secures this credit with a floating lien on Crafted Woodworks' raw materials (like lumber, fabric, and hardware) and its work-in-progress (partially assembled furniture). As the company transforms raw wood into chair frames, then into finished chairs, the specific items under the lien change form and value. The lien "floats" over these materials and evolving products, ensuring the lender always has a claim on the value of the assets in the production pipeline, even as they are consumed and new materials are acquired.
• Example 3: A Car Rental Company's Fleet
  "DriveAway Rentals," a large car rental agency, takes out a significant loan to expand its operations and update its vehicle fleet. The bank secures this loan with a floating lien on all vehicles owned by DriveAway Rentals, both current and future acquisitions. This means the lien is not tied to specific cars by their Vehicle Identification Numbers (VINs). Instead, it covers the entire pool of rental cars. As DriveAway Rentals sells older models, purchases new ones, and rotates vehicles in and out of service, the specific cars comprising the collateral change. Despite this constant turnover, the bank's security interest remains attached to the overall value of the company's dynamic fleet.