A floating lien is a security interest under Article 9 of the Uniform Commercial Code that attaches to an entire shifting category of a borrower’s business assets — most often inventory or accounts receivable — rather than to specific identified property. As the borrower sells and replaces those assets in the ordinary course of business, the lien automatically releases what leaves and attaches to what arrives. Setting one up requires a security agreement with the right clauses, a correctly filed UCC-1, and ongoing attention to deadlines that, if missed, can wipe out the lender’s priority.
How a Floating Lien Works
A typical security interest locks onto one asset: a specific machine, a named vehicle, a parcel of real estate. A floating lien covers a category instead. A retailer might turn over half its inventory in a week and replace it the next; the lien rides across the entire pool without the lender signing a new agreement for each transaction.
The engine behind this is the UCC’s proceeds rule. When a borrower sells collateral, the lender’s interest automatically attaches to whatever the borrower receives in exchange, whether 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 A distributor sells a pallet, deposits the check, and buys fresh inventory with the funds; the lien follows the money and reattaches to the new goods.
That automatic continuation has limits. Perfection in proceeds can lapse 21 days after it attaches unless certain conditions are met, 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 that limit rarely bites, because the financing statement already describes inventory broadly. When proceeds take a different form, like cash sitting in a bank account, the lender may need extra steps to hold priority.
The Two Clauses That Make the Lien Float
Two contract provisions give the lien its reach across time. Without both, it would freeze on whatever assets existed and whatever debt was outstanding the day the agreement was signed.
The after-acquired property clause extends the security interest to collateral the borrower obtains after the agreement is executed. Inventory arriving next month, receivables generated 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 lets the lien float rather than anchor to a static pool.
The future advances clause does the same work on the debt side. It makes the collateral secure not just the original loan but any subsequent credit the lender extends 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 on the after-acquired clause matter. It 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 The consumer goods limit keeps a commercial lender from sweeping in personal belongings over time. Commercial tort claims must be specifically identified in the agreement rather than captured by a blanket clause.
What a Floating Lien Does Not Reach
Even a lien described as covering “all assets” has gaps. Article 9 does not apply to real estate, so a floating lien cannot 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 adds another set of exclusions. Liens on registered copyrights, certain vessels, and certain aircraft must be recorded in federal registries to be perfected. A blanket grant in a security agreement may technically create the interest, but without the right federal filing the lien remains unperfected and vulnerable to competing claims.
Negotiated carve-outs show up in the agreement itself. Borrowers and lenders commonly exclude rights under contracts, permits, or government licenses where granting a security interest would trigger a default or require government consent. Intellectual property sometimes gets its own exclusion if pledging it could jeopardize the borrower’s underlying ownership rights. A lender who skims past these carve-outs may find its “all assets” lien has meaningful holes.
Making the Lien Enforceable Against the Borrower
The lien comes into existence through attachment, which makes it enforceable between the lender and the borrower. Three conditions must all be met:3Legal Information Institute. Uniform Commercial Code 9-203 – Attachment and Enforceability of Security Interest; Proceeds; Supporting Obligations; Formal Requisites
- The lender has given value, such as disbursing loan funds or extending a credit line.
- The borrower has rights in the collateral or authority to pledge it.
- The borrower has authenticated — usually signed — a security agreement that describes the collateral and grants the interest.
The conditions can be satisfied in any order; the lien attaches the moment the last one falls into place. For a floating lien on inventory, attachment often happens in rolling fashion, as the borrower acquires rights in each new batch.
Describing the Collateral the Right Way
The collateral description is where floating liens most often go wrong. The security agreement must “reasonably identify” the collateral, and the UCC allows descriptions by category — “all inventory” or “all accounts receivable” is sufficient.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. A security agreement cannot describe collateral by 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 The lender must name actual categories. An agreement that says “all assets” is unenforceable; one that lists “all inventory, all accounts receivable, all equipment, and all general intangibles” covers essentially the same ground and satisfies the statute.
The financing statement filed to perfect the lien has a looser standard. A UCC-1 can use supergeneric language like “all assets,” even though the underlying security agreement cannot. Drafters who use identical wording in both documents routinely trip on this difference.
Making the Lien Enforceable Against Everyone Else
Attachment handles the borrower. Perfection handles competing creditors, later purchasers, and a bankruptcy trustee. A valid but unperfected lien can still lose to a later creditor who perfected first.
The standard way to perfect a floating lien is filing a UCC-1 financing statement — a short public notice, not the security agreement itself. The UCC-1 must include the debtor’s name, the secured party’s name, and an indication of the collateral.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 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 make the entire filing ineffective, because later searchers will not find it. For organizations, the name must match the formation documents. For individual debtors, most states require the name as it appears on an unexpired driver’s license.
Keeping the Filing Alive
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 earlier than that window is ineffective. Filing after expiration means starting over with a new UCC-1 and losing the original priority date.
Borrower name changes create a separate hazard. If the borrower changes its legal name and the original filing becomes “seriously misleading” as a result, the UCC-1 remains effective only for collateral the borrower acquired within four months of the name change. To cover anything acquired after that, 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, where the point is capturing future collateral, missing that four-month deadline guts the lien’s value.
Where Another Creditor Can Jump Ahead
When several creditors claim an interest in the same collateral, the UCC sorts them with priority rules. The foundational rule is “first to file or perfect”: 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 A lender can file a UCC-1 before the security agreement is even signed, locking in a priority date. A floating lien perfected first keeps its senior position over later-filed interests even as the collateral turns over entirely.
Purchase Money Security Interests in Inventory
The most important exception is a purchase money security interest (PMSI) in inventory. A PMSI arises when a creditor finances the borrower’s acquisition of specific collateral, as when a supplier sells goods on credit. The UCC gives a PMSI holder super-priority over an existing floating lien on the same type of inventory, but only if the PMSI holder meets two conditions before the borrower receives the goods:10Legal Information Institute. Uniform Commercial Code 9-324 – Priority of Purchase-Money Security Interests
- The PMSI must be perfected by the time the borrower takes possession of the inventory.
- The PMSI creditor must send 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 a supplier’s PMSI jumps ahead on a large inventory delivery.
Cash Proceeds in a Deposit Account
A floating lien holder whose collateral generates cash 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 sits behind any creditor with a control agreement. Sophisticated floating lien arrangements almost always include one.
If the Borrower Defaults
After default, the UCC lets the secured party reduce the claim to a 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. The lender can sell publicly or privately, in one lot or in parcels, but every aspect of the disposition — method, timing, place, terms — must be commercially reasonable, and shortcuts invite 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.
Floating collateral adds urgency. Inventory may be perishable or losing value, and receivables may age past collectibility. Lenders often move quickly after default, collecting receivables directly from the borrower’s customers while liquidating inventory.
If the Borrower Files Bankruptcy
When the 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 enforcement moves inside the bankruptcy process.
The bigger threat is preference avoidance. A trustee can potentially claw back transfers to a creditor during the 90 days before filing, or one year for insiders. Because a floating lien keeps attaching to new collateral, each attachment is technically a “transfer” that could be challenged.
The Bankruptcy Code provides a safe harbor for floating liens in 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, and how much it exceeded the collateral value on the petition date. If that gap shrank, only the improvement is avoidable. If it stayed the same or widened, there is nothing to claw back.
Because inventory and receivable balances fluctuate constantly, a lender whose borrower files should reconstruct the collateral values at both measurement dates quickly, before the underlying data (inventory appraisals, receivable aging reports) becomes hard to pull.
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 come off. The UCC puts the duty on the secured party to file a termination statement, a UCC-3 that removes the financing statement from the public record.15Legal Information Institute. Uniform Commercial Code 9-513 – Termination Statement
For consumer goods, the secured party must file the termination within one month of the obligation being satisfied, with no demand required. For all other collateral, which covers the inventory and receivables of most floating liens, the secured party must act within 20 days after receiving an authenticated demand from the borrower.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 blocks or raises the cost of new financing. A stale UCC-1 shows up on lien searches and can delay a borrower from closing a new credit facility, so a termination that drags creates real liability for the lender and real harm for the former borrower.