Debenture - What is a debenture?
A debenture is a medium to long-term debt format that is used by large companies to borrow money
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Debentures are the most common type of long-term loans that can be taken by a company.
Debentures are typically loans that are repayable on a fixed date, but some debentures are irredeemable securities (these are sometimes called perpetual bonds), which means that they do not have a fixed date of expected return of the funds.
Most debentures are secured on the borrower’s reputation or credit history (in the US), and based on the borrower’s assets in the UK. However, some debentures are not (these can be known as ‘naked’ or ‘unsecured’ debentures). This is in contrast to loans that are typically based on collateral.
Most debentures also pay a fixed rate of interest. It is required that this interest is paid prior to dividends being paid to shareholders.
Debenture holders (investors) do not have any rights to vote in the company's general meetings of shareholders, but they are allowed separate meetings or votes e.g. on changes to the rights attached to the debentures.
The interest paid to debenture holders is calculated as a charge against profit in the company's financial statements.
Advantages of a debenture
The main advantage of debentures to companies is the fact that they have a lower interest rate than e.g. overdrafts. Also, they are usually repayable at a date far off in the future.
For an investor, their main advantages are that they are often easy to sell in stock exchanges and they contain less risk than other options such as equities, for example.
Convertible vs. non-convertible debentures
There are two types of debentures:
Convertible debentures: Convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. Convertible bonds are more attractive to investors since the bonds have the ability to convert and also attractive to companies since they typically have lower interest rates than non-convertible corporate bonds.
Non-convertible debentures: regular debentures which cannot be converted into equity shares of the liable company. Since they are not able to convert, they usually carry higher interest rates than convertible debentures.
Debentures and Debitoor
Invoicing and accounting software like Debitoor helps you stay on top of your business accounts, providing you with the tools to establish a company history of accurate records, including assets.
While your business might not yet be at the point of aplpying for a debenture, thorough and correct accounts can be crucial in helping your business secure a loan.