Debentures and business security explained

What a debenture covers

A debenture is a form of security registered at Companies House that gives a lender a charge over some or all of a company's assets, including fixed assets such as property and equipment and, through a floating charge, assets that change day to day such as stock and cash balances. It does not name specific items the way an asset finance agreement does; instead it captures a category of assets as they exist from time to time.

Most term lenders and revolving credit providers ask for a debenture as standard, even where the facility is not being sized specifically against the value of the underlying assets, because it improves their position relative to unsecured creditors if the business gets into difficulty.

Fixed and floating charges

A fixed charge attaches to a specific identifiable asset, such as a property or a piece of machinery, and prevents the company from dealing with that asset without the lender's consent. A floating charge sits over a class of assets that fluctuates, such as stock or debtors, and allows the company to continue trading with those assets in the ordinary course of business until the charge crystallises, typically on default or insolvency.

In practice a single debenture usually contains both, with fixed charges over specific identifiable assets and a floating charge over everything else. The distinction matters most in an insolvency, where fixed charge holders are paid ahead of floating charge holders and certain preferential creditors.

Priority between multiple lenders

Where a business already has one lender holding a debenture and wants to bring in a second facility, for example an invoice finance line alongside an existing term loan, the second lender needs either a subordinate ranking behind the first or a formal deed of priority carving out specific assets, such as the sales ledger, for its own exclusive charge. Without this, the second lender has weak security and either declines the facility or prices it higher to reflect the risk.

This is one of the most common structuring issues in multi-facility funding. Businesses often assume a second lender will simply accept second ranking, but many invoice finance and asset finance providers require a first ranking charge over the specific assets they are funding, which means negotiating a deed of priority with the existing lender before the new facility can complete.

How security affects pricing and structure

All else being equal, a lender that holds a debenture and enjoys a clear first ranking position over relevant assets will price a facility more keenly than one with weaker or shared security, because their recovery prospects in a downside scenario are better. This is one reason a well structured deal, where security is arranged cleanly across multiple facilities from the outset, often ends up cheaper overall than a series of facilities bolted on ad hoc over time.

What to check before agreeing to a debenture

Before signing, check what assets are excluded, if any, whether the debenture includes negative pledge clauses preventing you from granting further security elsewhere without consent, and whether there are financial covenants tied to the debenture that could trigger a default independently of missed payments. These clauses are standard in most debenture documents but their exact wording varies and can materially affect your ability to raise further finance later.