What is a debenture?

If you've applied for a business loan, you may have come across the term 'debenture'. It sounds more complicated than it is. It’s essentially a legal document that gives a lender security over a business's assets. 

Understanding what it means, and what you're agreeing to, is an important part of making informed decisions when it comes to borrowing.

How do debentures work?

A debenture is registered at Companies House and gives the lender a charge over some or all of the borrowing business's assets. This charge acts as security: if the business is unable to repay its debt, the lender has a legal claim over those assets.

There are two main types of charge associated with debentures

• Fixed charge - this is attached to a specific asset, such as property or equipment. The business cannot sell or dispose of that asset without the lender's permission while the charge is in place.

• Floating charge - this covers assets that change over time, such as stock or accounts receivable. The business can use and sell these assets in the normal course of trading, but the charge 'crystallises' and becomes fixed if the business defaults or enters insolvency.

Debentures are typically used for larger or longer-term lending arrangements. They give lenders greater confidence to offer finance, which can in turn make it easier for businesses to access the funding they need. If you're in the early stages of exploring finance options, our guide on getting a small business loan is a useful starting point.

Types of debentures

Debentures come in several forms, depending on the lending arrangement. Here’s what you need to know:

• Secured debentures - backed by a fixed or floating charge over business assets. The most common form in UK business lending.

• Unsecured debentures - issued without a charge over assets. These carry more risk for the lender and are typically reserved for businesses with strong credit profiles.

• Convertible debentures - can be converted into equity (shares in the business) at a future point, often at a pre-agreed rate. More commonly seen in investment contexts than standard business lending.

• Non-convertible debentures - must be repaid in cash and cannot be converted to equity. The standard structure for most business loan debentures.

• Redeemable debentures - repaid on or before a set maturity date. The most common structure for term-based lending.

Pros and cons of debentures

For businesses, debentures have clear advantages but are worth understanding in full before agreeing to one.

On the positive side, debentures allow businesses to access finance that might otherwise be unavailable or more expensive. By giving lenders security, they reduce the perceived risk of lending -- which may result in better rates and larger loan amounts. They can also be structured flexibly, with fixed or floating charges depending on what assets the business holds.

The main consideration is that a debenture gives a lender a legal claim over your assets. If your business runs into difficulty and cannot repay, those assets may be at risk. It's important to borrow within your means and to fully understand what you're securing the debt against before signing any agreement.

It's worth reading up on considerations for applying for finance before committing to any secured arrangement.

Why do businesses use debentures?

Businesses use debentures when they need access to finance that requires a higher level of security from the lender. They're particularly common in scenarios where:

• The loan amount is significant relative to the business's turnover or cash flow.

• The lending is over a longer term, where the lender's exposure is sustained for a longer period.

• The borrowing business has assets that can be used as security to strengthen the application.

From the business's perspective, agreeing to a debenture is often a practical step to unlock finance that would otherwise be harder to obtain. It's a normal part of business borrowing at a certain scale, not a sign that a business is in difficulty.

If you're weighing up your finance options, our guide on alternatives to bank loans covers a range of routes worth considering.

Debentures vs bonds

A bond is typically issued by larger corporations or governments to raise capital from the public or institutional investors. Bonds are tradeable on financial markets and usually carry a fixed interest rate paid to the holder over a set period.

A debenture, in UK business lending, is a private legal agreement between a lender and a business. It's registered at Companies House and not publicly traded. For small businesses, it's the debenture structure that's most relevant -  bonds are generally the domain of listed companies and public institutions.

Find out more about our small business loans at Funding Circle.

FAQs

How long do debentures last?

The duration of a debenture is tied to the loan or agreement it secures. Once the debt is fully repaid, the debenture is discharged and removed from the Companies House register. There's no fixed term and it exists for as long as the underlying financial obligation remains outstanding.

Why invest in debentures?

From an investor's perspective, debentures can offer a relatively predictable return through fixed interest payments, alongside a level of security if the business holds assets against which the charge is registered. This is a specialist area and independent financial advice is recommended before making any investment.

How to calculate the cost of debentures?

The cost of a debenture is mainly the interest paid on the underlying loan. To calculate this, you'd look at the annual interest rate applied to the outstanding balance. Some lenders also charge arrangement fees or other costs associated with setting up the debenture, which then needs factored into cost of borrowing. 

07/05/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.