Looking to secure funding that can support your business and growth ambitions? You have no shortage of options when it comes to finding commercial finance. One such option is getting a secured debenture, which can help you unlock the long-term help you need. From buying new stock to upgrading your equipment, it can make all the difference to your business.
Of course, no source of funding should be agreed to unless you're sure what you're signing up to – and it's entirely possible that you've never heard of a secured debenture before. Using our guide below, let us help you understand what it means from a business perspective. And from it, you'll hopefully get a much better idea of whether it's a solution that's right for you.
The first thing to note is that a debenture is not actually a type of commercial finance in and of itself. Instead, it's a written agreement that specifies the terms of a loan between you (as a borrower) and the lender. It's lodged at Companies House and gives a lender more protection. And when we refer to a secured debenture, the loan is 'secured' against collateral you provide.
In that respect, it's the same principle as a secured business loan. If you fail to repay the loan, the lender can take control of any assets you offer up as security – be it a vehicle or a piece of equipment. The terms of a debenture will set out the date on which a loan must be repaid. It'll also contain details of the interest payments you'll need to make.
A 'debenture' can mean different things in different countries, though either is possible. In the US, for example, it can be more common to encounter unsecured debentures. In the UK, however, it's highly unlikely that any debenture will be signed without some form of security.
The difference between secured and unsecured debentures is a simple one. The 'secured' aspect relates to any assets (or other form of collateral) you need to offer as part of a loan agreement.
For you, it helps you to access the funding you need. For the lender, it provides 'security' in that they can take ownership of that security if the loan isn't repaid. If a debenture is unsecured, the loan doesn't require any security. You could even look at it as a trust-based agreement.
Again, this question digs deeper into the detail of a debenture agreement. There's no difference in terms of the 'secured' nature of the loan. But the 'non-convertible' part? Ultimately, it's when you agree to pay back what you owe – as well as a fixed rate of interest for the duration of your loan period. In other words, that debt isn't converted into anything else.
Your next question, then, may well be 'what is a convertible debenture?'. And the answer is that it can be a method of debt financing that is then converted into equity shares after a set period.
H2: What can I use a secured debenture for?
As a form of finance, it's essential to remember that a secured debenture is a long-term option. As such, it's not something to consider if you need short-term financial support, e.g. to cover a cashflow gap. A dedicated cash flow finance solution, for example, would be more suitable.
If your vision is longer-term, however, then a secured debenture could be ideal for:
− Equipment upgrades
− New premises/relocation
− International expansion
It's highly unlikely that the terms of your debenture will prevent you from using the finance as your business sees fit – so there are numerous possibilities in terms of what it can be put towards.
The bottom line is that a secured debenture is where you take out a loan from your lender. The terms of the loan is then set out in a written agreement, which is then registered at Companies House. A lender will usually do this, although the borrower can also do so.
The terms will typically include details such as the amount borrowed, loan period (i.e. when it's to be repaid), interest rates and charges, and the collateral offered as security.
As explored in our main guide to debentures, there are two main types: fixed charge or floating charge. In principle, both are the same in that something of value is offered as security if you're agreeing to a secured debenture.
A fixed charge is as its name suggests. It's an asset or collateral with a specific value that passes to the lender if you fail to pay back what you owe by the specified date. Examples include your business premises, a vehicle, large equipment or even the value of debts owed to you.
In comparison, a floating charge is where the value of the asset(s) can change over time. This could be cash reserves or product inventory.
The value of the security doesn't have to equal the amount borrowed in all cases, either; it only needs to be of sufficient value to satisfy the lender. If you cease trading before you repay what you owe, registering the secured debenture also means that the lender becomes a priority creditor.
As with all forms of business funding, there are certain advantages and disadvantages of using a secured debenture. Being aware of both sides of the equation is critical to ensuring that you make the right decision when seeking financial support. And it's equally vital to know for sure if those advantages aren't outweighed by the disadvantages.
− The long-term nature of a secured debenture means you can obtain the funding you need to grow your business.
− By offering security, the amount you can borrow could be more than with alternative sources of funding, e.g. a bank loan or a business cash advance.
− The terms of a debenture offer total clarity and certainty over what you'll need to pay and by when. This can help you when planning your future finances.
− A secured debenture means putting your assets at risk. It's a failsafe for the lender in the event that you fail to pay, so a worst-case scenario for your business. But there is still a lingering risk you may lose that asset if you struggle with your repayments.
− You have no flexibility in the payment schedule. Once the debenture is registered, you must stick to the terms for the duration.
− With a fixed charge debenture, you don't have the ability to sell the asset(s) until your agreement period ends. It could be problematic if a lucrative opportunity emerges – or you need another way to raise finance before your debenture loan is repaid.
As with any loan backed by a debenture, you must first be a limited company (Ltd) or limited liability partnership (LLP). A sole trader or standard partnership cannot be covered by one.
If you qualify by that measure, the next stage is to find a lender who will allow you to borrow the amount you're looking for. Part of this will then include having the collateral of a sufficient value for the lender to agree. If not, your chances of obtaining funding this way could be slim.
Only you can be sure whether a secured debenture offers the best chance of securing funding for your business. The right information and advice can go a long way to helping you discover this, however. And that's where we can help. Even if it's not the most suitable option for your company, there are many other viable alternatives – like our commercial finance products. We help UK SMEs just like yours to fulfil your potential. From a short-term cash-flow challenge to long-term growth ambitions, let our experts help drive your forward. Contact us today for a bespoke quote and no-obligation consultation. We're here to help, so why not find out how?
4 May, 2022