Debentures are a written agreement that set out the terms, interest rate, security and repayment date of a loan. But there are a few different types to get your head around.
A redeemable debenture is a written agreement about a loan that must be repaid by a set time. Redeemable debenture documents generally include lower rates of interest and lengthier time frames for repayment.
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Once a loan is issued, the lender has 21 days to file a debenture with Companies House that outlines the terms of the loan. Once written, the lender gets top priority among future creditors.
If the agreement is not lodged with Companies House, the lender can legally be treated the same as other creditors if the company ever becomes insolvent.
A business owner takes out a loan in order to solve a cash flow issue with their business. In this situation, the lender and the borrower could create a debenture that outlines exactly how and when that sum of money would need to be repaid. This would then be filed with Companies House within 21 days.
We briefly mentioned irredeemable debentures earlier. Here’s the difference between the two:
Redeemable debentures: These written agreements cover how and exactly when companies must repay a loan to the original lender or debenture holder.
Irredeemable debentures: With irredeemable debentures, a company usually doesn’t have to repay the loan for a very long time or until it winds up.