“Fixed charge” can refer to a predictable recurring expense or a lien on a fixed asset for securing a loan. Companies can budget for fixed charges and use estimates for floating expenses. Creditors check the title of the asset before providing a loan and debtors should confirm the release of liens when paying off debts.
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 a regular interval. It can also mean a lien on a fixed asset for the purpose of securing a loan. The type of fixed charge that is generally understood is clear from the context of the discussion.
In the first case, a fixed charge will always be the same amount and will happen on a schedule. Rent is a classic example of a fixed charge. People know that the same amount of money will be due on the same date every month. This is in contrast to other expenses that may be more flexible, including variable amount charges, such as utilities, where there is no way to know in advance the amount of the charges.
A company can take this into account in budgeting decisions to ensure that it has enough money to cover these expenses. In addition, it also makes estimates of floating expenses. These estimates are based on historical performance and general industry trends to help the business arrive at an accurate estimate. Companies can use things like old utility records and maintenance records to see when they will incur expenses for various activities.
The fixed charge can also take the form of a lien. In this case, a creditor requires a security interest in a fixed asset to provide a loan. The classic example is a mortgage. Until the debtor repays the mortgage, the creditor retains an interest in the property. If the debtor defaults on the agreement, the creditor can seize the property and sell it to recover the cost of the loan. It is also possible to have a floating charge, where the interest is not on a fixed asset.
Fixed charges require some caution. Creditors first check the title of the asset to make sure there is no other priority creditor, as this could cause a problem if the debtor defaults. Debtors should be careful when paying off the debt, to confirm that the lien on the credit is released. If not, the debtor may have trouble selling the property in the future because the buyer will not want a property with a lien on it. People who aren’t sure if creditors have released their financial interests can perform a title search to see if liens come up.
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