What is a Company Debenture?

What is a Company Debenture? A debenture is a type of debt instrument that UK companies use to borrow money. Typically the first time most companies come across it is when a lender requests a debenture when borrowing. Lenders will often request a debenture from a limited company, the confusing part for many borrowers is […]

September 20th, 2024

What is a Company Debenture?

A debenture is a type of debt instrument that UK companies use to borrow money. Typically the first time most companies come across it is when a lender requests a debenture when borrowing.

Lenders will often request a debenture from a limited company, the confusing part for many borrowers is that the lender almost considers providing a debenture as commonplace or non-risk. If that is the case then why are they asking for it?

We are starting to see more unsecured business lending backed only by a debenture, it can be a good way to borrow but you need to be aware of what you are committing to.

Here’s what you need to know.

What is a Debenture?

The word ‘debenture’ is used differently in different sectors and it carries varying generic meanings. In this event we are looking at a debenture as an item of security provided by limited companies to support borrowing.

It is essentially a written acknowledgment of a loan or debt under which the company commits to repay the borrowed amount, typically with interest, at a specified future date. When a debenture is used as security for borrowing, it has the following key characteristics and functions.

Key Characteristics of a Debenture

Fixed and Floating Charges. Debentures can be secured by fixed and floating charges over the company’s assets. A fixed charge is on specific assets, this could be commercial property, machinery, an asset or even the debtor book. A Floating Charge is a charge on a class of assets, like stock, which can change in the ordinary course of business. It ‘floats’ over the assets and only becomes fixed in the event of default or insolvency. This is also known as crystalisation.

A company can provide multiple debentures to different lenders, in that event they all rank in order of when they were provided.

Functions of a Debenture

The reason why lenders like to take a debenture when lending is due to a few key abilities. These are the bits that many lenders never tell the borrower, I may go as far as to say many lenders don’t understand what powers the debenture provides (go ask them and see!).

In the event of the company’s insolvency, debenture holders have priority over unsecured creditors in the repayment hierarchy. This means they are more likely to recover their funds from the liquidation proceeds of the company’s assets.
If the company defaults on its debt obligations, the lender can enforce the security provided by the debenture. This can involve appointing a receiver to manage the company’s assets, selling the secured assets, or taking other legal actions to recover the outstanding debt. For many businesses there are few assets left when it comes to this stage of it’s trading life, the key for the lender is in appointing a friendly administrator – remember Woolworths, Bodyshop, Wilko? This was the case there.
Lenders holding debentures may have the right to receive regular financial information from the company, attend meetings, and, in some cases, influence significant decisions. This oversight helps lenders stay informed about the company’s performance and take preemptive measures if financial issues arise. Nearly every borrower I meet is unaware that lenders with a debenture have this power. In most cases nothing ever materialises but, it is worth bearing in mind.

Summary

In the UK, the issuance and regulation of debentures are governed by the Companies Act 2006 and various other regulations to ensure transparency and protect the interests of both the lenders and the company. Debentures are listed at Companies House and can be viewed publicly.

If I have one tip, it is to check that a lender has removed their Debenture once you are no longer borrowing from them. Most lenders will leave the debenture in place in case you borrow again, however it can make borrowing elsewhere more protracted. Check Companies House once your borrowing has been repaid.

It is not a throwaway piece of security, be aware of what it means and keep track of who you have given a debenture to.

By Dave Farmer

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.