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 meant is usually 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 contrasts with other expenses that may be more flexible, including charges of varying amounts, like utilities, where there is no way to know ahead of time about the amount of the charges.
A business can factor this into budgeting decisions to make sure it has enough money to address these expenses. In addition, it also makes estimates for floating expenses. These estimates are based on historic performance and general trends in the industry to help the business arrive at an accurate estimate. Companies can use things like old utility records and maintenance logs 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 in order 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 reneges on the deal, 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 in a fixed asset.
Fixed charges require some caution. Creditors check the title to the asset first to make sure there is not another creditor with precedence, as this could cause a problem if the debtor goes into default. Debtors need to be careful when the debt is repaid, to confirm that the credit's lien is lifted. If it is not, the debtor can have trouble selling the property in the future because the buyer will not want a property with a lien on it. People who are not sure about whether creditors have released their financial interests can conduct a title search to see if any liens come up.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.