A debenture is a type of loan agreement which is secured against a company’s assets. These are things the company owns, such as inventory or equipment. In this article we’ll cover what debentures are, how they work, and what they can mean for a business.
How is a debenture different from a standard loan agreement?
A debenture isn’t actually a loan itself. Debentures are an agreement between borrowers and lenders about how a company’s assets will be used as security against a loan.
Having a debenture in place gives a lender more security than a standard loan agreement. If the borrower goes into liquidation, the “debenture holder” (the lender) gets repaid before other creditors. It means they stand a better chance of getting their money back if things go wrong.
The debenture ‘protects’ the asset it is secured against from other creditors. So, if the company defaults or enters liquidation, those assets can be seized by the lender.
A standard unsecured lender will assess how likely they are to be repaid, based on how well the business is doing and its future prospects. If the chances of repayment are good, they’re more likely to offer a loan.
Who can register a debenture?
Because debentures must be registered with Companies House, they can only be made by limited companies or limited liability partnerships, and their lenders.
Different types of debenture
There are different types of debenture: fixed charge, and floating charge.
What is a fixed charge debenture?
A fixed charge debenture secures the loan against particular assets which the company owns – such as cars or property. This gives the lender ownership over that asset, so if the business can’t pay, the lender can take the asset as settlement for the loan.
What is a floating charge debenture?
Like with the fixed charge, the floating charge gives the lender priority when they want to reclaim repayments. Floating charge debentures can apply to all company assets including stock, cash, materials, and vehicles. What makes it “floating” is that the assets could change over time.
If a lender wants to enforce a debenture, a floating charge essentially becomes a fixed charge. When this happens, the borrower won’t be able to move or sell the assets without permission from the lender.
Should you raise money with debentures?
If you’re struggling to get a standard loan and have assets, then debentures might be useful to raise the funds you need. This does mean you risk losing any assets offered up as collateral, and might even be stuck with an asset until the loan is repaid, even if you need to upgrade.
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