What Is a Debenture and How Does It Work?

What is a debenture?

If you’re exploring business finance or reviewing your company’s borrowing arrangements, you may have come across the term debenture. It’s a word that sounds technical, but it plays a very practical role in the world of corporate finance.

In UK business law, a debenture is a legal document used to secure a loan against a company’s assets. It gives the lender certain rights if the company fails to meet its repayment obligations. Debentures are common in commercial lending – particularly between companies and banks, or in private lending agreements between directors, investors, or shareholders and the company itself.

In this article, we’ll explain exactly what a debenture is, how it works in practice, and the key points every business owner should understand before entering into one.

What Is a Debenture and How Does It Work?

A debenture is a written agreement that sets out the lender’s rights over the company’s assets. It’s typically used when a business borrows money and the lender wants security in case the borrower cannot repay.

When a debenture is signed and registered (usually at Companies House within 21 days), it creates a charge – a form of security interest – over some or all of the company’s assets. This means that if the company defaults, the lender can take control of those assets or appoint an administrator to recover the debt.

Debentures are a fundamental tool in corporate lending because they balance risk and reward: lenders gain reassurance, and companies gain access to finance that might otherwise be unavailable.

What Are the Key Features of a Debenture?

A typical debenture includes several core features:

• Security: the assets or property over which the lender has a charge.
• Fixed and floating charges: details of which assets are specifically secured and which are covered generally.
• Covenants: obligations the borrower must meet, such as maintaining insurance or not selling certain assets.

Together, these terms give the lender both financial and legal control if the loan for which the debenture constitutes security is not repaid, while defining exactly how far that control extends.

What Types of Charges Are There?

Charges generally fall into two categories: fixed and floating.

A fixed charge is secured over specific assets, such as property, vehicles, or machinery. The company cannot sell or dispose of those assets without the lender’s consent.

A floating charge covers a broader range of assets, such as stock, receivables, or cash – things that naturally change over time. The company can continue trading with those assets until it defaults, at which point the floating charge “crystallises” into a fixed charge, giving the lender control.

Many lenders use a combination of both, known as a fixed and floating charge debenture, to secure as much protection as possible.

Why Would a Company Have a Debenture?

Companies use debentures to access secured finance – that is, loans backed by assets. Because a debenture gives the lender security, it often allows the company to borrow at a lower interest rate or obtain a higher level of funding than would be available on an unsecured basis.

Banks, private investors, and even company directors may issue loans secured by a debenture to ensure that, if the business struggles financially, their investment is protected. It’s a way of turning an ordinary loan into a secured one.

When Should a Debenture Be Used?

Debentures are typically used in situations where substantial sums are being borrowed or where the lender requires formal security. They’re common in:

• Bank loans to limited companies
• Director or shareholder loans to the business
• Private equity or venture capital funding rounds
• Refinancing or restructuring arrangements

They’re less common for short-term or low-value loans, where the administrative cost may outweigh the benefit.

Is a Debenture a Legal Document?

Yes. A debenture is a legally binding document that must be properly drafted, executed, and, in most cases, registered at Companies House within 21 days of creation.

Failure to register it on time can invalidate the lender’s security, leaving them as an unsecured creditor if the company becomes insolvent. This makes professional drafting and timely filing essential.

What Is an Example of a Debenture?

Imagine a company borrowing £500,000 from a bank to purchase new manufacturing equipment. The bank may require a debenture that creates:

• a fixed charge over the machinery being purchased, and
• a floating charge over the company’s other assets, such as stock and receivables.

If the company defaults, the bank could enforce the debenture, take control of the machinery, or appoint an administrator to recover its money.

Alternatively, a company director who lends their own business £100,000 might also take a debenture to protect that personal loan in the same way a bank would.

What Are the Benefits of Debentures?

For lenders, the key benefit is security. A debenture ensures they have a legal claim over company assets, putting them ahead of unsecured creditors if the business fails.

For borrowers, a debenture can make finance more accessible and affordable. Secured loans often come with lower interest rates and greater confidence from investors or banks. They can also reassure stakeholders that the company’s borrowing is properly documented and controlled.

What Are the Risks of Debentures?

The main risk for the borrower is loss of control. If the company defaults, the lender has the right to enforce the charge, potentially seizing or selling company assets. In serious cases, they may appoint an administrator or receiver to manage recovery.

For lenders, the risk is that the value of the secured assets may not cover the full debt – particularly if the company’s financial position deteriorates quickly. This is why careful due diligence and professional drafting are essential.

Can I Have a Debenture Over the Assets of My Own Company?

Yes. Company directors or shareholders who lend money to their own business can take a debenture as security, provided it’s properly documented and registered. This can be especially useful when directors have made significant personal loans to the company and want to protect their position alongside external lenders.

However, care must be taken to ensure fairness and compliance with company law, particularly if other creditors or investors are involved. Corporate Law vs Commercial Law: What’s the Difference?

Why Do Banks Issue Debentures?

Banks issue debentures to secure the loans they provide to companies. Subject to the ranking of the debenture, it can give them first legal claim over the company’s assets if the borrower defaults, significantly reducing the bank’s risk exposure.

This is standard practice in corporate lending, especially for larger facilities or when lending to companies with limited trading history.

Are Debentures Safe for Businesses?

When used correctly, debentures are a safe and legitimate way to secure finance. They create clarity and structure in the lending relationship.

However, businesses should fully understand the implications before granting one. A debenture gives the lender significant control if repayments fail, which can be daunting for directors. Legal advice ensures the company enters the agreement with full understanding and appropriate protections in place.

Is a Debenture a Loan?

Not exactly. A debenture isn’t the loan itself – it’s the security document that protects that loan. The loan is the financial transaction; the debenture is the legal security instrument that supports it.

Think of it as the mortgage deed to your business borrowing.

What Is the Structure of a Debenture Document?

A well-drafted debenture will typically include:

• Confirmation of what assets are secured and the parties involved
• A charging clause detailing the fixed and floating charges
• Covenants outlining the borrower’s obligations
• Provisions for default and enforcement

Each section works together to define the legal relationship between the borrower and lender, protecting both sides from ambiguity.

What Is the Difference Between a Debenture-holder and a Shareholder?

Debenture-holders and shareholders have two very different relationships with a company.

A shareholder owns part of the company and may receive dividends based on profit. A debenture-holder, by contrast, is a creditor – they lend money to the company and can receive interest, not dividends.

Shareholders take on more risk but also the potential for growth; debenture-holders have lower risk and a fixed return, backed by security over assets.

Do Debentures Expire?

Yes. Debentures usually have a fixed term, tied to the duration of the loan. Once the loan is fully repaid, the debenture can be released or “satisfied” at Companies House, removing the lender’s charge over the assets.

This step is important to ensure the company’s records remain accurate and do not show outdated security.

What Do Debenture-Holders Get?

Debenture-holders can be entitled to receive interest payments at the agreed rate and repayment of their capital at the end of the loan term. If the company defaults, they may enforce their security and recover funds from the company’s assets before unsecured creditors are paid.

Summary of Debentures

Debentures are a cornerstone of business finance in the UK – powerful legal tools that allow companies to borrow securely and lenders to protect their investment. Used wisely, they provide flexibility, structure, and confidence to both sides of a lending arrangement.

At 3volution, our corporate solicitors advise lenders, directors, and investors on all aspects of debentures – from drafting and registration to enforcement and release. We make sure every agreement reflects your commercial goals and protects your legal position.

If you’re considering securing finance with a debenture, or lending money to your own company, speak to our corporate team today for practical, professional advice.

Debenture FAQ’s

What is a debenture in UK company law?

A debenture in UK company law is a legal document that secures a loan against a company’s assets. It gives the lender protection if the company cannot repay its borrowing, making it a common form of secured loan used by banks, investors, and directors.

How does a debenture work in practice?

To understand how a debenture works, the company grants the lender rights over some or all company assets. If the borrower defaults, the debenture allows the lender to enforce those rights, potentially appointing an administrator or taking control of secured assets.

What assets can be secured by a debenture?

Debenture security can include property, equipment, stock, receivables, and cash. Most debentures contain a fixed charge over specific assets and a floating charge over changing assets, offering broad protection to the lender.

What is the difference between a fixed charge and a floating charge?

The key difference between a fixed charge vs floating charge is control. A fixed charge attaches to specific assets and restricts disposal, while a floating charge allows the company to trade freely until default. Both are standard in secured lending arrangements.

Do debentures need to be registered at Companies House?

Yes. To be valid, a debenture must usually be registered at Companies House within 21 days of creation. Failing to register a debenture can invalidate the lender’s security, leaving them exposed as an unsecured creditor.

Why do banks require a debenture?

Banks require a bank debenture to reduce risk when providing business loan security. In corporate lending, a debenture gives the bank priority over company assets if the borrower defaults, making it standard practice for larger facilities.

Can directors take a debenture over their own company?

Yes. A director loan debenture allows directors or shareholders to secure a shareholder loan to their own company. When properly documented and registered, the director becomes a secured creditor, ranking ahead of unsecured lenders if insolvency occurs.

Is a debenture the same as a loan?

No. A debenture vs loan comparison shows that a debenture is not the loan itself. It is the security document that protects the loan. The loan creates the debt; the debenture secures it within business finance structures.

What happens if a company defaults on a debenture?

If a company defaults, the lender may begin debenture enforcement, which can include seizing assets, appointing an administrator, or enforcing fixed and floating charges. This process often occurs in insolvency or restructuring scenarios.

What are the advantages and risks of a debenture?

The advantages of a debenture include access to secured borrowing, lower interest rates, and lender confidence. The main business risk is loss of control if repayments fail, as the lender gains powerful enforcement rights over company assets.