A debenture in very simple terms is an agreement between a lender and a borrower which is registered at Companies House and lodged against your company’s assets.
The debenture is sometimes called a ‘floating charge debenture’ and includes all company assets. The charge is floating as some of the assets may be changing on a daily basis, such as stock for example.
The debenture secures the assets for the lender should the company fail and in liquidation, the charge becomes ‘fixed’ on the asset’s value at that point in time.
Banks and financial institutions use the debenture to secure their interests when providing any kind of finance where they believe there is a risk to them. Usually, the debenture will be registered on a fixed and floating charge basis to provide additional security for the bank or financial institution. In essence, this additional ‘fixed’ basis means the bank becomes a secured creditor.
What are the Risks of a Debenture?
Be aware a debenture provides a security to the bank in these circumstances and changes the nature of the relationship. Once the debenture is in place the bank has the right to put in place its own administrators should the company run into difficulty.
Directors Can use Debentures Strategically
What is less known is that directors can also use the debenture to secure their own interests’ when lending to a company. As long as the debenture is registered at Companies House at the time the loan is made the debenture can secure the company assets for the director.
Can You Invest in Debentures and is it Safe to do So?
In recent years, investing in debentures has grown in popularity. Although no investment is free of risk, debentures are more secure than investing in stocks, simply because you are guaranteed payments with good interest rates until the maturity period is up. Effectively, you are making money on the interest rather than the value of the stock itself,