“Fixed charge” can refer to predictable recurring expenses or a pledge on a fixed asset to secure a loan. Fixed expenses, like rent, require caution and creditors check ownership of the asset. Businesses can factor in fixed expenses to budget decisions and make estimates for variable expenses.
The term “fixed charge” is used in two different ways in the financial community. In the first sense, it refers to a predictable recurring expense that occurs at regular intervals. It can also mean a pledge on a fixed asset for the purpose of securing a loan. The type of flat rate intended is generally clear from the context of the discussion.
In the first case, a fixed charge will always be the same amount and will occur on a schedule. Rent is a classic example of a fixed rate. People know that the same amount of money will be due on the same date every month. This contrasts with other expenses that may be more flexible, including expenses of variable amounts, such as utilities, for which it is not possible to know the amount of expenses in advance.
A business can factor this into budget decisions to ensure that it has enough money to meet these expenses. It also makes estimates for variable expenses. These estimates are based on historical performance and general industry trends to help the company get an accurate estimate. Businesses can use things like old utility records and maintenance records to see when they will incur expenses for various activities.
The fixed fee can also take the form of a pledge. In this case, a lender requires a security interest in a fixed asset to provide a loan. The classic example is a mortgage. Until the borrower repays the mortgage, the lender retains an interest in the property. If the debtor reneges on the deal, the lender can seize the property and sell it to recoup the cost of the loan. It is also possible to have a variable fee, when the interest is not in a fixed asset.
Fixed expenses require some caution. Creditors first check ownership of the asset to make sure there is not another creditor with precedence, as this could cause a problem if the debtor defaults. Debtors must pay attention when the debt is repaid, to confirm that the credit lien has been revoked. Otherwise, the debtor may have trouble selling the property in the future because the buyer won’t want a lien property. People who aren’t sure whether creditors have released their financial interests can conduct a title search to see if liens emerge.
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