Debenture

A debenture is a means of a company giving a UK lender, security over their loan. Essentially, a debenture is a charge made over the borrower company’s assets, giving the lender security if the company defaults.

What is a debenture?

Debentures provide a charge over company assets and are very common with lenders, with almost all invoice finance deals including a charge. A debenture can cover all manner of assets, from standard stock, machinery, office equipment, property and sometimes even the whole of a company’s assets. Typically, a debenture will create a fixed charge over the specifically named assets of the company, usually fixed assets which are not regularly traded through the course of the business. A floating charge will then be put on the rest of the company’s assets.

A floating charge will grant the creditor some rights, such as the authority to appoint an administrator with powers to run the company and even sell its assets, if the borrower finds itself in default.

Different types of debenture charge

There are two different types of debenture charges, with lenders tending to seek one or both of the following depending on the nature of the deal.

Fixed charge

A fixed charge gives a lender to take possession and realise the asset in the event of default to recoup any debt.  Essentially it grants the lender possession and ownership of the borrower’s asset. If the asset realises more than the amount of the debt, then any surplus must be returned to the company (or to any appointed administrator or liquidator). If there is a shortfall the charge holder can take action against the company or claim against the appointed administrator or liquidator.

Fixed charges are normally held against the property, or other specified fixed assets.

As well as a fixed charge being able to cover a freehold or leasehold property, it can also cover other  assets. A company could see a fixed charge over building fixtures, trade fixtures, vehicles, fixed plant and machinery. When there is a fixed charge in place like this, the borrower would be unable to sell the asset without having the lender’s permission. If there was to be a sale, usually the proceeds would go towards the lender, or a new asset substituted with the lender.

Floating charge

A floating charge is very similar to a fixed charge; however, it covers a different range of assets from stock, vehicles, raw materials, debtors, intellectual property, fixtures and fittings. The nature of a floating charge means that these assets could change over time or on a regular basis, which in turn means that the borrower could sell these assets during their ordinary course of business without reference to the charge holder.

If there is a default situation with the borrower, that is when the lender can enforce the debenture effectively turning it into a fixed charge. This process is also known as the debenture crystallising. At this point, the borrower would not be able to deal with the assets in question unless they gain permission from the lender.

If there is an insolvency procedure, such as a liquidation or administration, a floating charge would give the lender priority over unsecured creditors when it comes to the allocation of asset realisation.

What can we do for you?

If you are looking at possible finance deals but are unsure about what a debenture could mean for you, it’s vital to understand your position. We would be happy to help guide you through what a debenture means for your finance deal and the effects it has.

If you’re considering a form of commercial finance, to help give you that extra source of funding, we are ideally placed in the market to help you proceed. We have years of experience working in the sector and have developed strong roots and connections, leaving us in the best possible position to negotiate the best deal for you and your business objectives.