Secured debentures explained

A debenture is essentially a loan agreement – but they come in many forms and can mean different things in different markets. Here’s an introduction to secured debentures and an overview of what they involve in the UK.

By Sean Martin on 15/10/2019

A secured debenture forms part of a loan agreement | iwoca

Debentures aren't a financial product in themselves, instead they're a tool used to define the specifics of a loan. We've written an article that covers the general details of debentures, while the following article is specifically about secured debentures.

What’s a secured debenture?

When a debenture is secured, it’s backed up by collateral. In other words, the lender receives a kind of insurance against the the loan not being paid back. If the borrower defaults and can't pay off their loan, the lender can redeem what is owed by acquiring the assets belonging to the borrower.

Banks and other lenders use secured debentures to manage risk and safeguard their investments, and the vast majority of UK debentures are secured.

How do secured debentures work?

Secured debentures are linked to assets, either with a fixed charge or a floating charge.

A fixed charge works a bit like a mortgage on a house, in that the borrower doesn't totally own the property until they'd paid back the funds borrowed. So, fixed charges would relate to security such as large machinery, property or vehicles. It can also be unpaid debts which are passed onto a lender via an invoice financing agreement.

Floating charges, on the other hand, cover assets which may fluctuate or change over time. These include things like moveable stock, cash reserves or smaller scale office equipment.

The secured debenture agreement itself defines the terms and conditions of a loan. For example, specifying the amount, the interest rate, the repayment schedule and the secured assets.

In the UK the debenture agreement must be filed with Companies House within 21 days of the loan being taken out. With a secured debenture in place, the lenders have priority among other creditors if the borrower becomes insolvent and can't pay what they owe.

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Example of a secured debenture

A factory or office building is a typical example of a fixed charge asset in a secured debenture.

If a borrower becomes insolvent, they are not allowed to sell a property asset without first repaying the lender or getting their lender’s permission. The lender acquires the rights to the property and any sale will be used to clear the debt. In addition to freehold or leasehold, a fixed charge can cover building fixtures, fixed plant and machinery, vehicles and other items.

How does an unsecured debenture differ?

A debenture is termed ‘unsecured’ or ‘naked’ when it is not backed by collateral (or assets).

In this scenario, unlike with a secured debentures, lenders have no immediate claim on the assets of a company if it becomes insolvent. Unsecured debentures are simply an acknowledgment of a due debt, and lenders must wait in line to be paid with other creditors.

Do you need to use a debenture?

If you're looking to borrow a relatively small sum with a business loan, you may not need to worry about debentures.

Check out our summary of the top 10 business loans to see what's on offer.