What is a debenture in business lending?

How lenders use it

A lender takes a debenture to improve its place in the queue if the company fails. Without security, the lender is an unsecured creditor and shares what is left with everyone else. With a debenture, the lender is paid from the secured assets first.

A fixed charge covers a specific asset. The company cannot sell it without the lender's consent. A floating charge covers a pool of assets that the company uses day to day. The company can sell stock and spend cash without asking. If the company defaults, the floating charge turns into a fixed charge over whatever is in the pool at that moment.

Floating charge holders do not come first. Some preferred creditors, such as employees for part of unpaid wages, are paid ahead of them. A set share of floating charge money must also go to unsecured creditors. A fixed charge is stronger for that reason.

Before lending, the credit team searches the charges register at Companies House. It looks for existing charges, because an earlier charge ranks ahead of a later one. A company with an existing all-assets debenture may need that lender to sign a deed of priority. A new lender must also register its charge at Companies House within 21 days of creating it.

A qualifying floating charge also lets the lender appoint an administrator without going to court. That is a main reason lenders ask for one.

Worked example

Example only. A lender offers a £100,000 loan and takes a debenture. The company owns an office worth £150,000 with a £90,000 mortgage ahead of the lender. That leaves £60,000 of value for the lender's fixed charge.

The floating charge covers £30,000 of stock. The company's invoice financier already holds a charge over its debtors, so the lender has no claim there. The credit team counts £60,000 plus part of the stock against a £100,000 loan. It does not count the asset values shown in the accounts.

Common confusions

In the UK, a debenture is security. In the US, a debenture is a type of bond that is not secured on any asset. It relies on the issuer's credit alone. If you read a US article, check which meaning it uses.

A debenture is not a guarantee. A debenture is given by the company over its own assets. A personal guarantee is given by a director or owner, and it puts their own money behind the loan.

Scotland has its own rules for how security is created. A lender with Scottish borrowers should take local legal advice. This page is general information and not legal advice.

Questions lenders ask

What is the difference between a fixed charge and a floating charge?

A fixed charge covers a named asset that the company cannot sell without consent. A floating charge covers assets that change, such as stock and cash, and the company can use them freely until the lender enforces.

Does a debenture have to be registered?

Yes. A company must deliver particulars of a charge to Companies House within 21 days beginning with the day after the charge is created. This is set out in section 859A of the Companies Act 2006. A late filing can leave the charge void against other creditors.

Why does a lender check the charges register before it lends?

Earlier charges usually rank ahead of later ones. The register shows who already holds security over the company's assets, so the lender knows what would be left for it.

Is a debenture the same as a bond?

Not in UK lending. A UK debenture is a secured loan document. In the US, a debenture is an unsecured bond. In company law the word can also cover bonds and other debt securities.

Personal guarantee: An owner's promise to repay if the company cannot
Invoice discounting: Borrowing against unpaid invoices, run by the business
Conditions precedent: What the borrower must deliver before the first draw
Development finance: A staged loan that pays for a property build

This page is general information for lenders. It is not legal, tax or credit advice.