What is a debenture in the UK?

Simply put a debenture is a security that a company offers a lender for funding, that is filed at Companies House. Typically the funding relates to a loan that is granted and is payable over time, but it can actually take any financial lending form (such as overdrafts).

A debenture provides the lender with security over a company’s assets. It can be fixed in nature – where it is charged over certain assets (typically freehold or leasehold property).

Alternatively, it can be a floating charge over various types of assets which change over time such as stock, work in progress, chattel assets and cash.

When a lender holds a debenture they have rights to the assets owned by the company and specified in the debenture, if the company defaults on the agreed terms of the lending. Furthermore, the company can’t sell those assets caught by the fixed charge without the specific consent of the lender.

When might you use a debenture?

A common example might be where a company needs to raise funds to acquire a new piece of equipment or to purchase property and at the time they might not have the current capital required to do so.

In turn, to raise that capital they can approach potential lenders to lend them the funds to carry out the purchase.

The lender (typically a bank) would seek to lend the capital on the premise that they have security over the assets of the company with a debenture. The debenture would specify the company assets and the appropriate charge type.

It’s actually fairly similar to the way a mortgage would work for an individual purchasing a property. A debenture gives security over the assets of a borrower company to the lender in the event that the borrower company defaults on the loan.

Why do companies use debentures?

There are a number of reasons for companies to use debentures:

– To raise capital for the business.  This might be for a variety of reasons, eg investments in new premises, equipment or simply to meet the increased working capital requirements of the business.

– It can provide a cheaper form of borrowing than an unsecured loan (although not always).

– You can usually secure greater funding by using debentures than if you were to get by way of an unsecured loan (again not always the case).

Can I have the benefit of a debenture over the assets of my own company?

Yes, you can actually secure your own lending to a company you own by way of a debenture over the assets of that company. That said, you need to be aware of priority where there are more than one debenture over the assets of a company.  Unless the parties agree, the rule is generally the first debenture ranks above subsequent debentures.

How do I apply for finance secured by a debenture?

It is quite simple, you can either directly approach a bank and detail what kind of arrangement you are looking for. They can, in turn, show you their range of potential offers for you to consider, specifically the details of what surrounds their debenture policy.

Likewise, you might want to consider a finance broker, who can work for you as an intermediary between the potential lenders, to try and secure you a deal that you might want to consider. Back to the home mortgage metaphor, this would effectively be your mortgage advisor trying to secure you the best deal to suit your requirements.

If you are wanting to personally lend your own money to your company and obtain security by way of a debenture, you should take professional legal advice on the documentation required.

What are the advantages of a debenture?

With the lender having security by way of a debenture, they are more likely to lend to a company more money at a lower rate of interest than they otherwise would if they did not have security.

If a lender is unsecured, there is nothing they can resort to if the borrowing company defaulted.  However, if the lender has the benefit of security by way of a debenture, the lender can turn to the company assets caught by the debenture to repay the debt if the borrower company defaults.

What are the disadvantages of a debenture?

As you would expect, if the company fails to make payments on loans secured by way of a debenture, the lender has the power to realise the assets caught by the debenture.  In addition, in some circumstances, they can appoint an administrator over the company or a receiver to carry out that realisation process.

Debentures aren’t loans (at least not always)

A debenture is not a loan but rather the legal document that gives security to the lender in respect of the loan over certain assets of the borrower.  As far as companies are concerned, they may have loans and / or overdraft facilities with banking lenders and in each case those loans may be secured or unsecured, but if they are secured they are generally secured by way of a debenture.

Who benefits from a debenture?

Both parties to a money lending contract benefit from a debenture, the borrower gets a bigger loan at a lower rate of interest and the lender gets some security in case the borrower defaults. 

Some common facts and issues about debentures

  1. Debentures must be filed at Companies House to be valid and effective.
  2. They do not expire until all the underlying borrowing that they relate to has been repaid unless the lender agrees to the contrary.
  3. Debentures are complex legal documents that have been used by the finance industry for very many years but still disputes between borrowers and lenders do arise from time to time in relation to these documents.
  4. The security that they create can either be fixed security or floating security.  Fixed security is more valuable to a lender than floating security.
  5. Lenders may seek from a borrowing company not only a debenture, but also personal guarantees from the directors of a company.
  6. Debentures give more power to a lender in the insolvency of a borrowing company than is afforded to a normal creditor of the borrowing company.
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