Introduction

Financial transactions often involve collateralized lending. A specific charge is a legal claim on a particular asset to secure a debt. In this guide, I will explore specific charges, their implications for lenders and borrowers, how they differ from floating charges, and their role in financial risk management.

What Is a Specific Charge?

A specific charge attaches to a well-defined asset, preventing its disposal without creditor approval. It ensures that a lender has priority over other creditors concerning that asset.

Characteristics of a Specific Charge

Feature	Description
Fixed Security	The charge applies to a specific asset, such as real estate or machinery.
Priority in Liquidation	The lender receives repayment from the asset before unsecured creditors.
Non-Transferability	The borrower cannot sell the asset without satisfying the charge.
Lower Interest Rates	Lenders often offer better terms due to reduced risk.

Mathematical Representation of Specific Charges

If a borrower secures a loan amount L with an asset valued at V , the loan-to-value (LTV) ratio is:

LTV = \frac{L}{V} \times 100

where:

• L is the loan amount,
• V is the appraised asset value.

A lender may require a minimum coverage ratio defined as:

CR = \frac{V}{L}

For example, if a lender provides a $500,000 loan secured by an asset worth $750,000, the LTV is:

LTV = \frac{500,000}{750,000} \times 100 = 66.67%

The coverage ratio is:

CR = \frac{750,000}{500,000} = 1.5

Specific Charge vs. Floating Charge

Criteria	Specific Charge	Floating Charge
Scope	Fixed on a particular asset	Covers all current and future assets
Control	Requires lender approval to sell	Allows business operation without restriction
Risk Level	Lower due to clear asset backing	Higher due to changing asset value

Example: Calculating Charge Coverage

A company secures a $1 million loan against equipment valued at $1.5 million. If the equipment depreciates at 5% annually, its value after 3 years is:

V_t = V_0 (1 - d)^t

where:

• V_t is the asset value after t years,
• V_0 is the initial value,
• d is the depreciation rate.

Substituting values:

V_3 = 1,500,000 (1 - 0.05)^3 = 1,500,000 \times 0.857375 = 1,286,062.50

The updated LTV ratio is:

LTV = \frac{1,000,000}{1,286,062.50} \times 100 = 77.8%

Risks and Considerations

1. Asset Depreciation: A declining asset value may reduce lender security.
2. Liquidity Constraints: The borrower cannot freely dispose of the charged asset.
3. Legal Enforcement: In case of default, the lender can enforce a sale to recover funds.

Conclusion

Specific charges provide structured security in lending. By securing debt against tangible assets, lenders mitigate risk while borrowers access better loan terms. However, both parties must evaluate asset depreciation and liquidity constraints before structuring such financial agreements.