What is a Debenture? Definition, Meaning and Examples
A debenture is a legal document that acknowledges a debt between a lender and your business. It is a form of security that gives the lender rights over your company’s assets if you fail to repay the debt.
If you borrow money, the lender may request a debenture to protect their position. This helps lenders reduce risk and can improve your chances of securing funding. In the UK, a debenture must be registered at Companies House within 21 days of being signed. This registration places the lender’s rights over your company’s assets on public record. For this reason, debentures are one of the most commonly used security documents in UK business lending.
In this guide, you will learn what a debenture is, the different types, and see practical examples. This will help you understand when and why a debenture may be required.
What are the different types of debentures?
There are two key ways a debenture can secure funding, through a fixed charge and/or a floating charge. Many debentures include both.
Fixed charge debenture
A fixed charge is security taken over specific business assets that you do not regularly sell or replace. This might include property, plant, machinery, or vehicles.
If a fixed charge is in place, you cannot sell or dispose of the asset without the lender’s permission. This gives the lender greater certainty, as the asset is clearly identified as security for the finance.
Floating charge debenture
A floating charge applies to assets that change as your business trades, such as stock, work in progress, or unpaid invoices.
Unlike a fixed charge, you can continue to use and sell these assets in the normal course of business. If your business defaults on repayments or enters insolvency, the floating charge may turn into a fixed charge, giving the lender control over those assets.
What is an example of a debenture?
For example, if you use Invoice Finance to access cash tied up in unpaid invoices due to slow customer payments, your lender will usually require you to sign a debenture as part of the facility.
The debenture is created by the lender and forms part of the funding agreement. It may include a fixed charge over your property, giving the lender security and reassurance that they can recover what is owed if the business stops trading. It can also include a floating charge over other assets, such as invoices.
Who can have a debenture?
You can only have a debenture if your business is a limited company or a limited liability partnership (LLP). A debenture cannot be taken over a sole trader or a standard partnership, as these business structures do not have separate legal status.
If you operate as a limited company or LLP, lenders will often require a debenture when providing business finance. This allows them to take security over your company’s assets rather than your personal assets.
What assets can be included in a debenture?
A debenture can cover a wide range of assets owned by your business, depending on how it is structured and the type of finance you are taking.
This may include:
- Property
- Vehicles, plant and machinery
- Stock
- Unpaid invoices and debtor balances
- Office equipment and fixtures
- Land
Some assets may be subject to a fixed charge, while others fall under a floating charge. This structure allows you to continue trading as normal while giving the lender appropriate security.
Summary
In summary, a debenture is a legal document that gives a lender security over your company’s assets when providing business finance. It is commonly used in UK lending and is often required when setting up an invoice finance facility.
At Time Finance, we use debentures to provide flexible Invoice Finance solutions that help you improve cash flow and support business growth. If you are looking for invoice finance or would like to discuss your funding options, please contact our team.