A floating lien is a security interest under Article 9 of the Uniform Commercial Code that attaches to an entire shifting category of business assets, such as inventory or accounts receivable, rather than to a single fixed item of collateral. As the borrower sells assets and acquires new ones, the lien automatically releases what leaves and captures what arrives. That mobility is what makes floating liens the standard structure for asset-based lending, and it is also what makes them unforgiving: the mechanism only works if the security agreement, the financing statement, and the follow-on maintenance are all done correctly.
How the Lien Floats
Most security interests lock onto a specific asset. A floating lien covers a category defined in the security agreement, even though the individual items inside that category turn over constantly. A retailer might sell half its stock in a busy week and restock the next; the lien covers all of it.
The engine is the UCC’s rule on proceeds. When a borrower sells collateral, the security interest automatically attaches to whatever the borrower receives in exchange, whether that is cash, a new receivable, or replacement goods.1Legal Information Institute. Uniform Commercial Code 9-315 – Secured Party’s Rights on Disposition of Collateral; Supporting Obligations; Proceeds The lender does not sign a new agreement or file a new statement for each transaction.
The automatic continuation has limits. Perfection in proceeds can lapse 21 days after it attaches unless certain conditions are satisfied, including a filed financing statement that already covers the type of property the proceeds represent.1Legal Information Institute. Uniform Commercial Code 9-315 – Secured Party’s Rights on Disposition of Collateral; Supporting Obligations; Proceeds For a standard inventory lien this is rarely an issue because the financing statement already describes inventory broadly. When proceeds take a different form, such as cash sitting in a deposit account, additional steps may be needed to hold priority.
The Two Clauses That Make a Lien Float
Two contract provisions give the lien its reach across time. Without both, it would freeze on the assets and the debt that existed the day the agreement was signed.
The after-acquired property clause extends the security interest to collateral the borrower obtains after execution. New inventory next month, new receivables next quarter, all fall under the existing lien automatically.2Legal Information Institute. Uniform Commercial Code 9-204 – After-Acquired Property; Future Advances This is what allows the lien to float rather than anchor to a static pool.
The future advances clause does the same thing on the debt side. It ensures the collateral secures not just the original loan but any later credit extended under the same arrangement.2Legal Information Institute. Uniform Commercial Code 9-204 – After-Acquired Property; Future Advances A revolving line of credit is the classic case: the borrower draws, repays, and draws again, and the same collateral pool secures every advance.
Two restrictions apply to after-acquired property clauses. The clause generally cannot reach consumer goods the borrower acquires more than ten days after the lender gives value, and it cannot attach to commercial tort claims at all.2Legal Information Institute. Uniform Commercial Code 9-204 – After-Acquired Property; Future Advances Commercial tort claims must be specifically identified rather than captured by a blanket clause.
What a Floating Lien Cannot Cover
Even a lien described as covering “all assets” has gaps. Article 9 does not apply to real estate, so a floating lien is no substitute for a mortgage or deed of trust. Insurance policies, tort claims other than commercial tort claims, and deposit accounts in consumer transactions also fall outside Article 9’s scope.
Federal law creates further exclusions. Liens on registered copyrights, certain vessels, and certain aircraft must be recorded in federal registries to be perfected. A blanket grant in the security agreement might create the interest, but without federal recording the lien remains unperfected and vulnerable to competing claims.
Deal-specific carve-outs matter too. Borrowers and lenders often exclude rights under contracts, permits, or government licenses where a security grant would trigger default or require consent. Intellectual property sometimes gets its own carve-out where pledging it could jeopardize the borrower’s rights. An “all assets” lien can have meaningful holes if these exclusions are not read carefully.
Creating the Lien: Attachment
A floating lien comes into existence through attachment, which makes the security interest enforceable against the borrower. Three conditions must all be satisfied:3Legal Information Institute. Uniform Commercial Code 9-203 – Attachment and Enforceability of Security Interest; Proceeds; Supporting Obligations; Formal Requisites
- The lender has given value, meaning disbursed funds, extended a line of credit, or otherwise committed something of value.
- The borrower has rights in the collateral, meaning ownership or the authority to pledge it.
- The borrower has authenticated a written security agreement that describes the collateral and grants the interest.
The order does not matter. The security interest attaches the moment the last condition falls into place. For floating liens, this often happens incrementally: the agreement is signed and value given on day one, but the lien attaches to each new batch of inventory only when the borrower acquires rights in it.
Describing the Collateral Correctly
The collateral description is where floating liens most often go wrong. The description must reasonably identify the collateral, but the UCC allows descriptions by category. Terms like “all inventory” or “all accounts receivable” are sufficient in the security agreement.3Legal Information Institute. Uniform Commercial Code 9-203 – Attachment and Enforceability of Security Interest; Proceeds; Supporting Obligations; Formal Requisites
There is one bright-line prohibition. The security agreement cannot describe collateral using a supergeneric phrase like “all the debtor’s assets” or “all the debtor’s personal property.”4Cornell Law School Legal Information Institute. Uniform Commercial Code 9-108 – Sufficiency of Description Actual categories must be named. An agreement that says “all assets” is unenforceable; one that says “all inventory, all accounts receivable, all equipment, and all general intangibles” covers essentially the same ground and satisfies the statute.
The financing statement is different. A UCC-1 can use supergeneric descriptions like “all assets,” even though the underlying security agreement cannot. Lenders who draft both documents with identical language sometimes trip on this gap. The security agreement needs category-level specificity; the financing statement just needs to indicate what collateral is covered.
Perfecting the Lien
Attachment makes the lien enforceable between the borrower and the lender. Perfection makes it enforceable against everyone else, including competing creditors, later purchasers, and a bankruptcy trustee. Without perfection, a lender with a valid lien can still lose to a later creditor who perfected first.
The standard method is filing a UCC-1 financing statement. This is a short public notice, not the security agreement itself. It must include the debtor’s name, the secured party’s name, and an indication of the collateral covered.5Legal Information Institute. Uniform Commercial Code 9-502 – Contents of Financing Statement; Record of Mortgage as Financing Statement; Time of Filing Financing Statement
The filing goes to the Secretary of State’s office in the jurisdiction where the debtor is located. For a corporation or LLC, that is the state of organization, not the state where the collateral sits.6Legal Information Institute. Uniform Commercial Code 9-301 – Law Governing Perfection and Priority of Security Interests
Getting the debtor’s name right is the single most important detail. An incorrect or misspelled name can render the filing ineffective because searchers will not find it. For organizations, the name must match formation documents. For individuals, most states require the name on the debtor’s unexpired driver’s license.
Keeping the Filing Current
A UCC-1 is effective for five years from filing.7Legal Information Institute. Uniform Commercial Code 9-515 – Duration and Effectiveness of Financing Statement; Effect of Lapsed Financing Statement When it lapses, the security interest becomes unperfected, and the UCC treats it as if it had never been perfected at all against purchasers for value.
To prevent lapse, the secured party must file a continuation statement during the six-month window before the five-year term expires.7Legal Information Institute. Uniform Commercial Code 9-515 – Duration and Effectiveness of Financing Statement; Effect of Lapsed Financing Statement Filing before that window opens is ineffective. Filing after expiration means starting over with a new UCC-1 and losing the original priority date. Missed continuations remain one of the most common and costly administrative failures in secured lending.
Name changes are a second hazard. If the borrower changes its legal name and the original financing statement becomes seriously misleading as a result, the filing remains effective only for collateral acquired within four months of the change. To cover collateral acquired after that window, the lender must file an amendment with the corrected name.8Legal Information Institute. Uniform Commercial Code 9-507 – Effect of Certain Events on Effectiveness of Financing Statement For a floating lien, whose whole point is capturing future collateral, missing the four-month deadline guts the lien’s value.
Priority Among Competing Creditors
When multiple creditors claim an interest in the same collateral, the UCC ranks them by the “first to file or perfect” rule. Conflicting perfected security interests rank by whichever creditor first filed a financing statement or first perfected, with no gap in between.9Legal Information Institute. Uniform Commercial Code 9-322 – Priorities Among Conflicting Security Interests in and Agricultural Liens on Same Collateral
This rule rewards speed. A lender can file a UCC-1 before the security agreement is even signed, locking in a priority date. A floating lien perfected first holds its senior position over later interests even as the collateral turns over entirely.
Purchase Money Security Interests
The most important exception involves a purchase money security interest (PMSI) in inventory. A PMSI arises when a creditor finances the borrower’s acquisition of specific collateral, such as a supplier selling goods on credit. The UCC gives the PMSI holder super-priority over an existing floating lien on the same type of inventory, but only if two conditions are met before the borrower receives the goods:10Legal Information Institute. Uniform Commercial Code 9-324 – Priority of Purchase-Money Security Interests
- The PMSI is perfected by the time the borrower takes possession of the inventory.
- The PMSI creditor sends authenticated notice to any holder of a conflicting security interest, describing the inventory and stating the PMSI creditor’s intent to acquire the interest.
The notification requirement exists so the floating lien holder can adjust its lending before advancing more funds against inventory that will sit behind a senior PMSI.
Deposit Accounts and Control
A floating lien holder whose collateral generates cash proceeds faces a priority gap when that cash lands in a bank account. The UCC gives priority in deposit accounts to a secured party that has control over the account, typically through a deposit account control agreement with the bank, over one that does not.11Legal Information Institute. Uniform Commercial Code 9-327 – Priority of Security Interests in Deposit Account A lender relying only on its filed UCC-1 to reach proceeds in a deposit account will sit in second position behind any creditor with a control agreement. Sophisticated floating lien arrangements almost always include one.
Enforcement After Default
When a borrower defaults, the secured party can reduce its claim to judgment, foreclose, or use any other available judicial process, and these rights are cumulative.12Legal Information Institute. Uniform Commercial Code 9-601 – Rights After Default; Judicial Enforcement
The most common path is selling the collateral. After default, the secured party can sell, lease, or otherwise dispose of the collateral, but every aspect of the disposition must be commercially reasonable: method, timing, place, and terms all face scrutiny. Cutting corners on the sale process invites challenges from the borrower or junior creditors.
An alternative is strict foreclosure, where the lender keeps the collateral in full or partial satisfaction of the debt. This requires the borrower’s consent, either by agreement or by failing to object within 20 days after receiving the lender’s proposal, and no objection from other secured parties with junior interests in the same collateral.13Legal Information Institute. Uniform Commercial Code 9-620 – Acceptance of Collateral in Full or Partial Satisfaction of Obligation In consumer transactions, partial satisfaction is prohibited entirely.
For floating liens, the shifting nature of the collateral adds practical urgency. Inventory may be perishable or losing value. Receivables may age past collectibility. Lenders often move quickly after default, collecting receivables directly from the borrower’s customers while liquidating inventory in parallel.
Floating Liens in Bankruptcy
When a borrower files for bankruptcy, the automatic stay halts collection and prevents the lender from seizing or selling collateral without court permission. The lien survives, but it cannot be enforced outside the bankruptcy process.
The larger threat is preference avoidance. A bankruptcy trustee can potentially claw back transfers made to a creditor during the 90 days before filing, or one year for insiders. Because a floating lien continuously attaches to new collateral as the borrower acquires it, each attachment is technically a transfer that could be challenged as a preference.
The Bankruptcy Code provides a specific safe harbor for floating liens under Section 547(c)(5). The trustee can only avoid the transfer to the extent the lender actually improved its position during the preference period.14Office of the Law Revision Counsel. 11 USC 547 – Preferences The test compares two snapshots: how much the secured debt exceeded the collateral value at the start of the 90-day period, versus how much it exceeded the collateral value on the petition date. If the gap shrank, meaning the collateral cushion grew relative to the debt, only the improvement is avoidable. If the gap stayed the same or widened, the trustee has nothing to claw back.
Because inventory and receivable balances fluctuate, a lender whose borrower files should reconstruct collateral values at both measurement dates promptly, while inventory appraisals and receivable aging reports are still accessible.
Releasing the Lien After Payoff
Once the debt is paid in full and the lender has no remaining commitment to advance funds, the lien should be released. The UCC places the obligation on the secured party to file a termination statement, a UCC-3 form that removes the financing statement from the public record.15Legal Information Institute. Uniform Commercial Code 9-513 – Termination Statement
For the inventory and receivables that make up most floating lien collateral, the secured party must file the termination within 20 days after receiving an authenticated demand from the borrower. Consumer goods have a stricter rule, requiring termination within one month of the obligation being satisfied even without a demand.15Legal Information Institute. Uniform Commercial Code 9-513 – Termination Statement
If the secured party ignores the demand, the borrower can file the termination itself. The lender also faces a statutory penalty of $500 for each failure to comply, plus actual damages if the lingering filing prevents the borrower from obtaining new financing or increases borrowing costs. A stale UCC-1 shows up on lien searches and can block or delay a borrower’s new credit facilities, so a lender who drags its feet on termination generates real liability for itself and real harm for its former borrower.