What is a debenture?

If you’ve ever looked into business loans or finance options, you may have come across the word “debenture.” Understanding how debentures work is important if you’re thinking about borrowing money or managing your company’s finances strategically.

What is a debenture?

A debenture is a legal agreement used to secure a loan. When a business borrows money, the lender may request a debenture to protect their position. It gives the lender rights over certain company assets, meaning they can take control of those assets or appoint an administrator if the business cannot repay the loan.

In simple terms, a debenture ensures the lender can recover what they’re owed if the borrower defaults. The steps are:

1. The business borrows money.

2. The lender registers a debenture over the business.

3. The debenture sets out the lender’s rights over the business’s assets.

Once signed, a debenture must be registered at Companies House within 21 days, making it part of the public record. This lets other creditors or potential lenders know that someone already has a legal claim over the company’s assets.

Why do lenders use debentures?

Debentures give lenders security and priority. In the event of insolvency, the lender with a registered debenture is repaid before unsecured creditors, such as suppliers for example. This reduced risk means lenders are often willing to:

• Offer better interest rates or repayment terms

• Lend larger sums, since their money is protected

For the borrower, it’s a way to access secured funding while maintaining operational control of the business, as long as repayments are made.

The types of debentures

There are two key ways a debenture can secure a loan, through a fixed charge and/or a floating charge.

Fixed charge debenture

A fixed charge is a debenture attached to specific, identifiable assets such as property, machinery, vehicles, or equipment. With a fixed charge the company cannot sell or dispose of that asset without the lender’s consent. If the company defaults, the lender can take possession or sell the asset to recover what’s owed. Fixed charges are common in asset based lending, such as property loans or equipment finance.

Floating charge debenture

A floating charge covers assets that change regularly, such as:

• Stock or inventory

• Raw materials

• Cash in the bank

• Debtors (money owed to the company)

The business trades freely under a floating charge, buying, selling, and replacing its assets as part of daily operations. However, if the company defaults on the loan or becomes insolvent, the floating charge “crystallises”. When that happens it becomes a fixed charge and the lender gains control over those assets.The lender can then appoint an administrator or take steps to recover the debt.

Who uses debentures?

Anyone lending money to a company can register a debenture to protect their position. Debentures are most commonly used by:

• Banks and commercial lenders when issuing business loans

• Alternative finance providers when offering invoice finance, asset-based lending, or secured loans

• Investors or directors who lend money to their own business

How do debentures affect a business?

Many established and successful companies operate with active debentures on their record. Here’s what to consider to understand the impact on your business:

1. It can affect future borrowing
   A debenture gives the lender a first legal charge over your company’s assets, so new lenders might be reluctant to offer secured finance unless they can take a “second charge.” That usually means they get paid after the first lender in the event of insolvency, so it’s higher risk for them.

2. It can give the lender enforcement powers in event of default
   If your business defaults on its repayments, the lender can use their debenture rights to appoint an administrator, take control of secured assets and recover money owed through asset sales. That’s why it’s important to understand exactly what rights the debenture gives before signing.

3. It’s visible on your public record
   Debentures are registered at Companies House. Anyone, including future investors, partners, or lenders can see them under the “Charges” section of your company record.

How long does a debenture last?

A debenture remains in place until the debt is fully repaid. Once the loan is settled, the lender should issue a “Deed of Release” and file a satisfaction charge with Companies House to remove it from your record. If this doesn’t happen automatically, you can request that the lender or their solicitor files it.

It’s worth checking your company’s record to make sure old or satisfied charges have been cleared, as they can make your business look more indebted than it is.

Checking if a company has any debentures

You can easily see if any business currently has any registered debentures, here's how:

1. Visit Companies House.

2. Search for your company name.

3. Select the “Charges” tab to view active and satisfied debentures.

This section lists the lender, date created, and whether the charge has been released. If you see a lender’s name there, it means they hold (or once held) a legal claim on the business' assets.

Debentures in insolvency: priority of repayment

In the unfortunate event of a company becoming insolvent, there’s often a hierarchy of repayment that determines who gets paid first from the company’s remaining assets. This process is designed to protect creditors based on the level of security they hold. Here’s a typical priority of repayment:

1. Secured creditors with fixed charges are paid first from the sale of those specific assets.

2. Preferential creditors (like certain employee claims) come next.

3. Floating charge holders are then paid from the remaining assets.

4. Unsecured creditors (suppliers, contractors, etc.) are paid last, this means that there is the possibility of them receiving little or nothing of what they were owed.

This hierarchy shows just how powerful a debenture can be. For a lender, holding a fixed or floating charge can significantly improve their chances of recovering funds if a business fails. For business owners, it underlines the importance of understanding exactly what rights and obligations a debenture creates before signing one as it can directly affect how a company’s assets are treated.

Debentures and your company credit profile

When you apply for funding, lenders review both your credit report and Companies House filings to understand your company’s existing financial commitments. If there’s already a debenture in place, they’ll look at who holds it and whether there’s capacity for further borrowing. This helps them determine the level of risk involved in lending to your business.

That’s why it’s important to keep track of your credit position and registered charges. By regularly checking your business credit score, you can see what lenders see, make sure your company’s information is accurate, and identify opportunities to strengthen your credit profile before applying for more finance. At Capitalise, we make that easy. You can check your business credit score for free, see any existing debentures or charges, and access funding from over 130 trusted UK lenders, all in one place. Sign up today to get started.