What is a Debenture?Published on 16th August 2018 2018-08-16T11:31:30+00:00 - Last update on 12th September 2018 2018-09-12T23:22:06+00:00
After sourcing the most appropriate finance solution for your business’ needs, you must now enter negotiations with your chosen lender. As well as making sure that you’re able to receive the level of capital you need and gain a favourable interest rate, you’ll also be confronted with a number of different financial terms that you may not be familiar with. One topic that many business owners get confused with is the matter of Debentures. But rather than sign up to any agreement placed before you, it’s vital that you fully understand everything involved first. So, to help make an informed decision and avoid any unexpected surprises, this is what you need to know when discussing a debenture.
What is a Debenture?
A debenture is a mechanism that directly affects the order of priority and is often requested by lenders when applying for a variety of finance products, such as Commercial Mortgages, Invoice Finance, Business Loans or Goodwill Loans. Although it’s easy to mistake it for another form of security, a debenture is a written agreement struck between you and the lender based upon your creditworthiness and the reputation of the lender, before being registered with Companies House. It generally doesn’t involve the use of physically assets (equipment, machinery, vehicles or property) as collateral, which is established separately depending on your chosen product, but does bring into question the capital that’s held within your business. So, in the event that your business becomes insolvent, the lender holding a debenture will be granted priority of repayment. As such, they’ll be able to recover what they’re owed before any other lenders. However, what you need to appreciate is that debentures work in two parts: a Fixed Charge and a Floating Charge.
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What is a Fixed Charge?
If you’ve acquired capital to purchase assets (equipment, machinery, vehicles or property) or released equity in unpaid business-to-business (B2B) invoices to support your business, the lender can place a Fixed Charge over those assets or the money owed by the debtor. So whilst a finance agreement is in place, you do not own these assets or the money you receive from the debtor. This means that you’re unable to sell the asset or spend these funds without the lender’s permission. Therefore, anything which is subject to a Fixed Charge presides in the lender’s domain. Should these assets be sold in the event of insolvency, the capital generated from the sale is recovered by the lender to protect their investment.
What is a Floating Charge?
Meanwhile, a Floating Charge is an alternative capital recovery mechanism that lenders can use to protect their investment should your business become insolvent. In this instance, the charge is placed on anything that your business uses to trade. This can involve anything from stock and raw material, furnishings, fixtures and fittings, unencumbered assets (that aren’t subject to Fixed Charges or any other finance arrangements) to capital. Therefore, since these assets can vary in quantity as your business trades, lenders find it more practical to place a Floating Charge on them instead. That’s because Floating Charges take into account the assets (which are applicable in this instance) and any other assets you acquire in the future, regardless of whether you’ve informed the lender or not.
Thinking about raising funds for your business?
In order for your business to grow and maintain reliable day-to-day operations, ensuring that you have access to sufficient amounts of capital is a vital responsibility. However, whilst exploring what finance solutions your business may be eligible for, it’s easy to feel lost and confused by the financial terms you’ll be confronted with. But rather than entering an agreement that you don’t fully understand, which could prove problematic in the long run, know that you needn’t explore the entire UK lending landscape alone. Help is at hand.
At Rangewell, we’re an Access to Finance specialist and have mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process in plain English. So if you’re looking to raise funds for your business but aren’t sure how to proceed, apply for Business Finance today or find out more with Rangewell.
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