Definition of debenture: A long term business loan which is ‘secured’ against the assets of the company. This is a UK definition.
What does debenture mean
In the UK, a debenture is a specific type of loan with security (also known as collateral) offered to the lender. The ownership of a debenture may be freely transferred between parties if the terms allow.
Debentures are becoming relatively uncommon but they are still used by some businesses.
The security provided means that if the terms of the debenture are breached, the debenture holder may apply to the courts to seize assets of the company to recoup the amount outstanding.
Security is typically registered officially with Companies House, so that other members of the public and credit providers can see that the lender has placed a claim on the companies assets.
Debentures are usually structured with a fixed maturity date, at which point the principal amount of the loan is repaid in full. Interest is typically paid in instalments during the course of the loan.
How is the word debenture used in a sentence?
This is how the word debenture might be used in a sentence:
“Company ABC raised £10m of finance through the issue of 10-year debentures.”
“A debenture is a far more sustainable way to fund capital expenditure than an overdraft.”
About this definition of debenture
This definition is specific to the UK.
Internationally, the word debenture is used in a more broad sense to mean any loan. It has become quite interchangeable with ‘bond‘ for example. In the US, the use of the term ‘debenture’ does not imply that security has been provided.
For this reason, it would be unwise to assume too much about the terms and conditions of a debenture until you perform further research.
How does the definition of debenture relate to investing?
When analysing the capital structure or balance sheet of potential equity investments, you may notice that the company is funded by a mixture of debentures and other bank finance.
Unlike some bank loans (like overdrafts), which can be recalled at any time, debentures provide a company with certainty over its financing. This is because the principal amount will only be due on the maturity date of the debenture.
The company is, therefore, able to use the funds to finance long term capital expenditure which may take several years before it can return a profit.
Further details regarding the characteristics of a debenture will be disclosed in the financial instruments or liabilities section of a company’s financial statements.
Details will typically include the value, the interest paid in the year, the maturity date and if the loan is secured against the companies assets. For further information on the disclosure requirements, refer to a good financial accounting book.