Charge: Overview, definition and example
What is a charge?
A charge is a legal right that gives one party, usually a lender, a claim over the property or assets of another party, typically the borrower, as security for a debt. If the borrower doesn’t repay the loan or meet their responsibilities, the lender can enforce the charge by selling the asset to recover the money owed.
For instance, if a business takes out a loan and offers its vehicles as security, the lender can place a charge on the vehicles. If the loan isn’t repaid, the lender can sell the vehicles to get their money back.
Why is a charge important?
Charges are important because they protect lenders. They provide a safety net by ensuring the lender can recover their money if the borrower defaults. For borrowers, agreeing to a charge can make it easier to secure a loan or better terms because it reduces the lender’s risk.
In business, charges also help organize which creditors get paid first if a company runs into financial trouble. Creditors with a charge on assets usually get priority over others.
Understanding a charge through an example
Let’s say a retail company borrows money to expand and offers its warehouse as security. The lender places a charge on the warehouse. If the company fails to make loan payments, the lender can enforce the charge and sell the warehouse to recover the debt.
In another scenario, a tech startup gets funding from a bank to buy equipment. The bank puts a charge on the equipment. If the startup defaults on the loan, the bank has the right to seize and sell the equipment to recover its losses.
An example of a charge clause
Here’s an example of how a charge clause might appear in a contract:
“To secure repayment of the loan, the Borrower grants the Lender a charge over the assets listed in Annex A. In the event of default, the Lender may enforce this charge and take possession of the secured assets to recover the outstanding debt.”
Conclusion
A charge gives lenders a legal right over a borrower’s assets, ensuring that loans or obligations are backed by something valuable. This protects lenders while helping borrowers access financing.
By understanding how charges work, businesses can make informed decisions when borrowing money and ensure they meet their responsibilities to avoid losing secured assets. It’s a key tool in balancing risk in financial agreements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.