Debenture is a long-term debt instrument issued by a corporation or government to raise capital. Debentures are essentially unsecured loans, meaning they are not backed by specific assets of the issuer. Investors rely on the overall creditworthiness and reputation of the issuer to receive their promised interest payments and the return of their principal investment at maturity.

More information on understanding Debenture

A debenture can replace a personal guarantee acting as security for a business loan. With a debenture, the funder will take security over fixed or floating assets (or usually both). Fixed assets will be things like the equipment, building etc and floating assets will be those which still have value, but they change in quantity (like stock). In the event that a borrower does not pay a loan, the funder will then have control over those assets and can use them to recover the outstanding debt.

The advantage for a borrower is that the liability stops with the business, as it separates the personal from the business quite neatly, meaning personal assets are not at risk in the event of business insolvency. A lender will only go for this option if the business has valuable assets and if those assets are not already subject to existing debentures (they are registered on Companies house), or if those assets are already on finance.
The lender benefits by controlling assets under the debenture, so for example, the borrower cannot sell those assets without permission of the lender. The lender also ranks ahead of unsecured creditors in the case of insolvency. So, for the lender, they are in a stronger position with insolvency than they would be with a guarantor, where the lender would merely be another unsecured creditor.

For a business which has an average balance sheet and high value assets not already under finance where the directors had personally guaranteed other loans, a lender may decide to offer this option. Having security over assets prevents a borrower from selling the items with a debenture prior to insolvency. If a borrower did get into financial difficulty the assets would be sold with the proceeds going to the lender. If a borrower takes the same finance without the debenture but with a personal guarantee, the customer could dispose of business assets in the months leading up to insolvency and the lender with a personal guarantee would join the queue with the rest of the unsecured creditors.

How can Portman help?

Visit our helpful article on Understanding Personal Guarantees for Business Loans for more information. Alternatively, contact our experienced team to see how your business could benefit from No Personal Guarantee.

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