A debenture is a type of contract used by lenders, such as a banks, when providing working capital to companies and limited liability partnerships. It enables the lender to secure loan repayments against the borrower’s assets in the event of default.
In more detail
Debentures are commonly used by traditional lenders such as banks when providing funding to companies. To register a debenture a lender has to file it at Companies House within 21 days of its creation.
There are usually two types of charge granted:
Fixed charge – with this the lender can ensure it is the first creditor to recoup any outstanding debt if the borrower defaults on a loan. The most common form of fixed charge assets are property, intellectual property and goodwill.
Floating charge – this attaches to all of a company’s non-fixed charge assets or specific classes of assets including stock, vehicles, raw material, debtors, fixtures, fittings and cash.
You might hear about floating charges ‘crystalising’ which is what happens when a business enters insolvency.
A debenture holder has the right to appoint an administrator to take control of the company if it defaults on the loan.