Looking to take out a business loan? Your lender will want to make sure they’re protected if you can’t repay. Often, this will involve asking for a personal guarantee. But in some circumstances, where the loan’s particularly large or the lender wants extra security, they’ll ask for a debenture instead.
If you haven’t encountered debentures before, this article will fill you in on the details so you understand how they work and are prepared for how they could impact your company.
In a nutshell: A debenture is a legal contract that gives lenders the right to claim a company’s assets before any other lenders if you can’t repay the loan. It’s typically used by lenders for larger or more complex loans. As well as offering the lender security, it can also give your company access to lower interest rates and higher borrowing limits.
What are debentures?
Debentures are legal documents that link loans to one or more of a limited company’s assets, such as a property or piece of equipment. They protect the lender if you can’t pay back the loan, allowing them to legally claim and sell the assets to recover their money.
Lenders typically use debentures for larger loans where they want maximum protection against potential defaults. Unlike regular secured business loans, where the lender only has a claim on one specific asset, debentures can cover multiple assets and give the lender priority over all unsecured creditors waiting to be repaid.
The extra protection debentures provide lenders often allows companies to secure better interest rates and borrow larger amounts.
What does debenture mean?
The word ‘debenture’ comes from the Latin ‘debere’, which means “to owe.”
In business, it’s used as a formal way of saying: “This company owes money, and here’s how the lender is protected”.
How do debentures work?
When you agree to take out a loan or credit facility with a debenture, the lender will first draw up the debenture document alongside the main loan contract. This will include specifying which assets are included and what type of charge applies to each (fixed or floating, see below). They’ll then file it with Companies House where it becomes public, allowing other lenders to see what assets are already secured if they’re considering lending to your company.
Once in place, the debenture won’t disrupt your daily operations – you’ll still be able to sell stock and collect payments as usual. But you won’t be able to sell fixed assets or use the same assets as security for another loan without your current lender’s permission.
If you default on the loan, the floating charge ‘crystallises', converting to a fixed charge over the assets it covers. The lender would then appoint an administrator to take control and sell the assets to recover their money. The debenture would make sure they’d get paid before other unsecured creditors.
Debentures can be used to secure a wide range of finance, including:
What’s the difference between a fixed and floating charge debenture?
Debentures can involve one of two types of charges, or both:
A fixed charge debenture is linked to specific assets, like property or machinery. You can’t sell these assets without the lender’s permission.
A floating charge debenture is linked to assets that change, like cash or stock. You can use or sell these assets, but the charge crystallises if you default on the debt or enter insolvency.
What happens to a debenture once the loan’s paid off?
Once you’ve fully repaid the debt:
The lender will issue a Deed of Release which formally confirms the debt has been settled and releases the lender’s claim over your assets
They’ll file a ‘statement of satisfaction’ with Companies House to officially record that the charge has been settled
The charge will be marked as ‘discharged’ on your public record, showing other lenders that the assets are no longer secured
These changes will usually be reflected on Companies House within a few days. But double-check and contact the lender if you don’t see the update within a couple of weeks, as they’ll stay on record until the lender removes them.
Can you have multiple debentures?
There’s no legal limit on how many debentures a company can have. But because multiple debentures results in multiple lenders claiming the same pool of assets, two extra rules apply:
The ‘first come, first served’ rule: By default, priority is determined by the date the debenture was registered at Companies House. So the lender who registers their debenture first gets paid back first.
The Deed of Priority: This is a legal contract between multiple lenders and your company that overrides the default ‘first come, first served’ rule and sets out how assets are split between lenders (eg Lender A gets priority over the property and cash, and Lender B gets priority over unpaid customer invoices and stock).
What are the pros and cons of debentures?
Benefits of debentures
Access larger loan amounts or credit limits
Secure more competitive interest rates
Keep full control of your company without giving away equity
Downsides of debentures
Assets are at risk if you default on the debt
You may still need to provide a personal guarantee
There’s less flexibility to sell your pledged assets
Fixed interest payments could put pressure on cash flow
Who uses debentures?
Debentures are typically used by:
Large or public limited companies borrowing at fixed interest rates
Limited companies and LLPs seeking secured loans
Companies needing major funding relative to their turnover or cash flow
Companies with long-term lending arrangements, where the lender remains exposed to risk for many years
Sole traders and partnerships aren’t able to use debentures because they’re not incorporated businesses.
Examples of debentures
A small limited company takes out a £50,000 business loan from a high-street bank to cover day-to-day costs. The bank registers a debenture with a floating charge over the company’s current assets, including cash and stock. This allows the company to continue selling its stock as usual, but if it can’t repay the loan, the bank can claim the assets covered by the charge.
A retail company takes out a £300,000 loan to buy delivery vans and point-of-sale equipment. The lender registers a debenture with a fixed charge over the assets. The company uses the vans and equipment as normal, but it can’t sell them without the lender’s approval. If the loan isn’t repaid, the lender can take and sell the assets to recover the money.
A manufacturing company borrows £1.5 million to buy a new warehouse and machinery. The bank registers a debenture with a fixed charge over the warehouse and equipment, plus a floating charge over the company’s other assets. This gives the bank security over the new assets and broader protection over the rest of the company if the loan isn’t repaid.
How do debentures impact future borrowing?
Having a debenture can make it harder to secure certain types of business finance in the future because you may be restricted to ‘second charge’ loans. This is where the new lender would be second in line for repayment if you’re unable to repay the loan.
In practice, second charge loans typically result in:
Higher interest rates
Lower borrowing limits
Stricter lending criteria
Despite these potential downsides, debentures can unlock better borrowing rates and terms now. So taking on a debenture-backed loan may still be worth it for your company.
How do you register a debenture with Companies House?
When you take out debenture-backed financing, the lender will file it with Companies House. They’ll have to register it within 21 days from the date the agreement was signed. And if they miss that deadline, the charge (ie their claim to your assets) will become void and they’ll lose their priority in the repayment queue if your company goes into liquidation.
Wrapping up
If you’re planning to take out a large or complex business loan, you may be asked to sign a debenture. While they’re common in business lending, they’re not usually well known outside the world of secured finance.
Here’s a reminder of the key points:
A debenture is a legal agreement that links a loan to your company’s assets, giving the lender a claim on them if you can’t repay
It protects the lender by giving them priority over other unsecured creditors if your company defaults
Debentures can cover fixed assets (like property or machinery) or floating assets (like stock or receivables) or both
They’re registered at Companies House, so they’re part of the public record
Once the loan’s repaid, the lender files a Deed of Release and a statement of satisfaction to remove the charge
You can have multiple debentures, and priority is usually determined by the order they’re registered
Debentures can unlock lower interest rates and higher borrowing limits, but they also come with risks, like the lender seizing your assets if you default
Tide has helped thousands of UK companies navigate and secure over £1.6 billion in funding, including debenture-backed business loans. With a panel of over 80 lenders and borrowing terms up to £20 million, there’s a good chance you’ll find what you’re looking for. Compare your options and secure a quote without affecting your credit score today.
Debentures FAQs
What’s the difference between debentures and bonds?
A bond is a loan you give to a company or government. In return, they pay you interest and give your money back on a set date.
A debenture is a type of bond, but in the context of business lending, it usually refers to the legal document that links a loan to your company’s assets.
Can debentures affect my company’s credit score?
A debenture can impact your company’s credit score in both positive and negative ways.
It increases your company’s debt and is visible on the public record at Companies House
If you make repayments on time, this could improve your score
If you miss payments or default, this can damage your score
To keep an eye on how borrowing may be affecting your company’s credit score, consider using Tide’s Credit Score Insights.
Are debentures suitable for small businesses?
Debentures can work for small businesses if they’re well established limited companies or LLPs, and are borrowing very large amounts or the lender wants extra security. But if your business is very small, newer, or needs to borrow a smaller amount, a regular business loan or other types of finance may be more suitable.
What is a negative pledge?
A negative pledge is a clause in a loan agreement that stops you from using the same assets as security for another loan without the lender’s permission. It protects the original lender by ensuring they keep their first claim on those assets if you borrow again.
Do debentures require a personal guarantee?
Debentures don’t always require a personal guarantee, but they often do. As the debenture secures a loan against your company’s assets, a personal guarantee assures the lender that you, as a director, are personally responsible if the company can’t repay. This is more common with smaller, newer companies.
Does a secured business loan automatically mean I have to sign a debenture?
No, a secured business loan doesn’t require a debenture. In cases where the lender wants security over several company assets rather than just one specific asset, a debenture may be a suitable option. But where the loan is smaller or the lender is happy with more limited protection, other types of security, such as a personal guarantee, are more common.
What’s the difference between asset finance and an asset-backed debenture?
Asset finance is a type of loan that’s used to buy a specific asset, like equipment or vehicles.
An asset-backed debenture is a legal document that can cover one or more assets, or even all of your company’s assets.
Photo by Romain Dancre on Unsplash
