What is a debenture?
Nobody goes into business thinking they will fail, but unfortunately, its a possibility that lenders have to consider when handing out loans, which is where debentures come in. Learn everything you need to know about debentures, starting with our debenture definition. Debenture definition  Simply put, a debenture is an agreement made between a borrowing company and a lender. It confirms that the loan is secured against the companys assets. Then, the debenture is registered at Companies House, so its an official record. This means that if it fails, the lender will get their money back. The debenture is intended to protect the lender if the business goes under. However, should they fail to register the debenture at Companies House within 21 days, it can be more difficult to recover the debt. Debentures also stipulate that the lender claims its costs from the business, not from personal assets. The following should be included in a debenture document:  The total borrowed  The interest rate  Whether that interest rate is fixed or variable  Total to be repaid  Timeframe for repayments  Any other charges  Fixed and floating debentures meaning  There are two different types of debentures, and you should always confirm which type you are signing up to:  Fixed debentures  This type of debenture is secured against a fixed asset like real estate, automobiles, or machinery. With this debenture, you may not be allowed to sell the asset, which means you wouldnt be able to expand or move, upgrade equipment, or even get a new car until the loan is paid off. Floating debentures  Floating debentures are secured against assets that dont have a set value, for example, inventory. Unlike a fixed debenture, you can continue to sell and buy freely. If the business does fail, the floating debenture crystalizes, i.e., the value of the asset, which was previously unclear, is finalised. It is possible for floating debentures to be placed on all of a companys assets and a fixed debenture to be placed on one particular asset. In this case, the fixed debenture takes priority when it comes to a lender claiming back payment. Other debentures  While fixed and floating debentures are the most prominent, there are several other types of debentures, including:  Secured: These debentures are secured against an asset (which will be sold to pay any debt). Unsecured (also known as naked): These debentures are not secured against any assets, so the lender will not have any specific claim to any given asset should the company fail. Due to this, the interest rates for unsecured debentures are often higher. Redeemable debentures: These require the borrower to repay their loan, either in whole or in instalments, by a fixed date. Irredeemable debentures: These dont have a due date, with repayment being set for when the company goes into liquidation or is dissolved. Debenture advantages and disadvantages  As with any loan, there are pros and cons to consider. All debentures are loans, but not all loans are debentures. A loan must be paid back by a set date and must be secured against something of equal value. A debenture doesnt need to be taken out against something of equal value, simply something deemed sufficiently valuable, which is why they can be secured against something variable like inventory. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.