What is a debenture? A guide to secured business loans and company charges

If you're looking for a business loan to fuel your next stage of growth, you'll likely come across the term "debenture". While it might sound like a bit of dense legal jargon, it's actually a very common tool used in the world of UK business finance.

In simple terms, a debenture is a document that provides security for a lender. If you're a limited company or a limited liability partnership (LLP) taking out a secured loan, the lender will often use a debenture to protect their interests.

Understanding how they work - and the difference between a fixed and floating charge debenture - is vital for any business owner. In this guide, we'll explain what debentures are, the different types, and why they’re required, so you can sign on the dotted line with confidence.

What does debenture mean?

In the UK, a debenture is a written agreement between a lender and a borrower. It's registered at Companies House and gives the lender a "charge" over some or all of your business assets.

Think of it like a mortgage on a house. When you take out a mortgage, the bank has a legal claim over the property until the debt is paid. A debenture works similarly but for your business. It ensures that if the company can't repay the loan, the lender has a prioritised claim to recover their money from the business’s assets.

What are the different types of debentures?

Lenders don't just take one type of security. A debenture can create two main types of "charges": fixed and floating. Most modern debentures for SMEs are all-encompassing, meaning they include both fixed and floating charge debentures to give the lender the best possible protection.

What is a fixed charge debenture?

A fixed charge debenture is attached to specific, identifiable assets that the business owns. These are usually high-value items that you don't plan to sell in your day-to-day trade.

Common assets covered by a fixed charge include:

• Property and land: Your office, warehouse, or retail space

• Plant and machinery: Heavy equipment or vehicles fixed to your premises

• Intellectual property: Trademarks, patents, and copyrights

• Book debts: Unpaid invoices (common in invoice finance)

With a fixed charge, you generally cannot sell or dispose of the asset without the lender’s written permission. This gives the lender a higher level of control and security.

What is a floating charge debenture?

A floating charge debenture is a bit more flexible. It "floats" over a class of assets that change in value or quantity every day. This allows you to keep running your business normally without asking for permission every time you make a sale.

Assets covered by a floating charge usually include:

• Stock and inventory: The goods you sell to customers

• Raw materials: Items used in your manufacturing process

• Movable plant and equipment: Computers, office furniture, or small tools

• Cash: The money currently in your business bank account

What is a fixed and floating charge debenture?

Most lenders will ask for a fixed and floating charge debenture. This is effectively a catch-all document. It places a fixed charge on specific high-value assets (like your building) and a floating charge on everything else. This ensures the lender is first in the queue for the big stuff while still allowing you the freedom to trade your stock.

Converting a floating charge

The special thing about a floating charge is that it can convert or "crystallise". This essentially means that the charge stops floating and fixes onto the assets the business owns at that specific moment.

Crystallisation usually happens if the business:

• Defaults on the loan

• Goes into liquidation or administration

• Ceases to trade

Once a charge has crystallised, you can no longer sell or use those assets without the lender's consent. The lender can then appoint an administrator to sell the assets and recoup the debt.

Why do lenders require a debenture?

It might feel a bit intrusive to have a lender taking a claim over your assets, but there are actually some benefits for you as a borrower:

1. Lower interest rates: Because the loan is secured, the lender is taking less risk. This often translates to a cheaper interest rate for you.

2. Higher borrowing limits: Lenders are much more likely to offer larger sums of money (often £50,000+) if they have the security of a debenture.

3. Longer terms: Secured loans often come with longer repayment periods, which can help your cash flow.

4. No dilution of equity: Unlike bringing in an investor, a debenture doesn't require you to give up any shares or control of your business decisions.

Registering a debenture with Companies House

Once you've signed a debenture, it must be registered at Companies House within 21 days. This is a legal requirement. It makes the charge a matter of public record, so other potential lenders or suppliers can see who has a claim on your assets.

If the debenture isn't registered within that three-week window, it could become void against a liquidator or administrator. This means if things go wrong, the lender would lose their priority status and become an unsecured creditor - ranking right at the back of the queue for repayment.

What happens to debentures in the event of insolvency?

In the unfortunate event that a business fails, there’s an order of priority for who gets paid first. Debenture holders sit near the top:

1. Fixed charge holders are paid first from the sale of the specific assets they have a charge over

2. Insolvency practitioners fees and expenses come next

3. Preferential creditors, which includes employees (for arrears of wages) and HMRC (for certain taxes like VAT and PAYE)

4. Floating charge holders are paid from whatever is left after the above have been paid

5. Unsecured creditors, like suppliers, contractors, and customers

6. Shareholders are at the very bottom

By having a debenture, the lender ensures they aren't left fighting for scraps with unsecured suppliers.

Is a debenture right for you?

A debenture is a powerful tool that can unlock the funding you need to take your business to the next level. While it does give a lender a claim over your assets, it's a standard part of secured lending and usually leads to better rates and higher loan amounts.

If you're comfortable with the security requirements, a debenture could be the key to your next growth phase.

Ready to explore your funding options?

At Funding Options by Tide, we help limited companies and LLPs find the right secured finance for their needs. Whether you're looking for asset finance to buy new machinery or a secured business loan for working capital, we can match you with the right lender in minutes.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.

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