Redeemable debentures explained
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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.
What is a redeemable debenture?
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.
How do redeemable debentures work?
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.
So, a redeemable debenture outlines the debt that a person or business is going to take on. This debt is likely to impact cash flow in both the short-term and further afield. To find out more, check out our philosophy of debt article that explores the history of lending.
A simple example of a redeemable debenture
A business owner takes out a loan in order to solve a cash flow problem 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.
Read on below to find out the difference between redeemable and irredeemable debentures.
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What's the difference between redeemable and irredeemable debentures?
To clarify, here's the difference between these two types of debentures:
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.
More on loan security types:
