Priority Rights of Secured Lenders in Collateralized Inventory
Secured inventory priority depends on continuous perfection via proper state filings, strict PMSI notice compliance, and contractual landlord waivers.
Floating Lien
Meaning
Security interests attach dynamically to shifting categories of asset pools that constantly change through ongoing business operations without requiring individual pledge agreements. Commercial credit agreements use a floating lien to secure revolving credit lines against raw materials, work in process, finished inventory and shifting accounts receivable. The charge floats continuously over the collateral pool as individual items enter and leave factory storage floors.
The security interest crystallizes into a fixed charge upon event of default or facility acceleration.
Collateral Shift
Manufacturing throughput continuously replaces old inventory with new raw material deliveries under a single umbrella security charge. As finished machinery ships out to buyers, the floating interest automatically transfers from physical goods to generated accounts receivable. This automatic substitution allows plant managers to process materials without seeking lender permission for every material movement.
Crystallization Trigger
Covenant breaches or missing loan payments convert the flexible encumbrance into a fixed legal charge over existing warehouse stock. Post-crystallization, the plant operator loses authority to sell inventory or collect receivables without explicit creditor consent.
Priority Vulnerability
Purchase money security interests taken by component suppliers override pre-existing floating charges on newly delivered raw materials. Statutory tax claims and employee wage debts also take legal precedence over floating encumbrances during corporate administration.