Debentures

Definition

A debenture is a type of long-term debt instrument used by companies and organisations to borrow money from investors. In return, the issuer agrees to repay the principal amount along with interest over a specified period.

What it means

Debentures allow businesses to raise capital without giving up ownership or equity. Investors who purchase debentures effectively lend money to the issuer and receive regular interest payments in return.

In the UK, the term can also refer to a form of security agreement that gives a lender a charge over a company’s assets.

Types of debentures

• Secured debentures: Backed by company assets as collateral
• Unsecured debentures: Not backed by specific assets and rely on the issuer’s creditworthiness
• Convertible debentures: Can be converted into shares under certain conditions
• Non-convertible debentures: Remain as debt until maturity

Example

A company issues £10,000,000 in debentures with a 5% annual interest rate and a 10-year repayment term. Investors receive annual interest payments while the company gains access to long-term funding.

Why debentures matter

• Provide businesses with access to long-term capital
• Allow companies to fund growth, acquisitions or expansion
• Offer investors a fixed-income investment opportunity

Important to note

Debenture holders are creditors, not shareholders. They generally have priority over equity investors if the company becomes insolvent.

In the UK, debentures are commonly used in commercial lending arrangements and may include fixed and floating charges over business assets.