What is a debenture?

A debenture is a legal document used to define the terms of a secured business loan for a limited company or limited liability partnership. It includes the full amount of the loan, the interest rate and term, and the specifics of the lender’s rights to the asset mentioned.

What is the purpose of debentures and how are they used?

When a business takes on a secured loan the terms of that lending are documented in a debenture so that, if the company cannot afford to repay, the lender can enforce their rights to the asset.

The financier places a legal charge against the asset or assets mentioned. If the company or limited liability partnership later fails, they can call in the loan and appoint an administrator to take control of the asset(s). These are then typically sold to recover the outstanding debt.

What are fixed charge and floating charge debentures?

Fixed charge debentures

A fixed charge debenture secures the loan against a specific business asset – perhaps a vehicle, a piece of machinery, or your business premises. If your business fails, the lender can take possession of that asset and sell it to recoup their money.

One implication of a fixed charge debenture is that you cannot sell the asset whilst the loan is outstanding unless you obtain written permission from the lender. They might agree that you purchase a replacement asset, for instance, and then place a new charge against that.

Floating charge debentures

A floating charge debenture doesn’t use a specific asset as security but is used to secure ‘movable’ assets such as raw materials, computer equipment, and office fixtures and furniture.

Inventory is also commonly used in this respect if it has sufficiently high value for the lender’s requirements. If stock is used you can still buy and sell it with a floating charge and it doesn’t impinge on your freedom to carry out day-to-day business operations.

Advantages and disadvantages of debentures

Debentures can grant you access to higher levels of borrowing, which may be unavailable to you on an unsecured basis. The funds obtained in this way are typically used to purchase new machinery or equipment, to boost cash flow, or to finance business expansion.

One of the downsides of debentures is the risk that, if your company cannot repay, it could be placed into liquidation. This is because an administrator can be appointed by the lender in the event of loan default.

It’s crucial to make sure that a solicitor reviews any proposed debentures before you sign them. This helps to protect you and your company from any unreasonable or unexpected terms should your business experience financial decline in the future.

If you would like more information on debentures and the potential implications for your business, please contact our expert team at UK Business Finance. We’re commercial finance brokers with a wealth of experience and understand the criteria of all lenders in the UK. We offer free consultations and operate a network of offices around the country.