What is a debenture?

If you take out a loan, you might have to sign a debenture. In the UK, the term 'debenture' refers to a secured loan agreement between a lender and you, the borrowing business. As a definition, a debenture is a tool used to define the conditions of the loan, such as how a business’ assets will be used as security, how much you’re borrowing and the agreed interest rate.

If that's still unclear, don't worry. Debentures are often misunderstood. In this guide we’ll unpack exactly what they are and the different types that exist. For now, just remember that a debenture is a tool used to define the specifics of a loan, rather than being an actual financial product itself.

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How do debentures work?

A debenture means that if you default on your loan your lender will be able to claim against assets owned by your business, like laptops, property or machinery (but not your personal assets). In technical terms the lender ‘places a charge against your business assets’ – but it doesn’t actually cost you anything, it’s a legal ‘charge’.

Once you and the lender have agreed on the details of the loan and signed the debenture, the lender needs to file it at Companies House within 21 days. If they don’t do this and your business goes under, the lender would only have as much claim to what's owed as any other unpaid unsecured creditor.

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Debentures vs bonds: what’s the difference?

Both bonds and debentures are ways for organisations to borrow money, but there’s a key distinction. While bonds can be secured or unsecured, debentures are typically unsecured, meaning they aren’t backed by collateral. Instead, they rely on the financial strength and reputation of the issuer.

In simple terms: a bond might come with a safety net (like property or assets), while a debenture doesn’t, making it riskier but often more flexible.

For businesses, debentures are a common tool to raise long-term capital without giving up ownership or securing assets. Investors get regular interest payments, and the company keeps control.

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What's the difference between fixed debentures and floating debentures?

Debentures come in many different shapes and sizes, one important variation that you'll need to understand before signing one is the difference between 'fixed' and 'floating'. These differences will determine how your loan will be secured – whether against a fixed asset such as your car or your business premises, or against a floating asset such as your inventory.

Fixed charge debentures

If you and your lender agree to a fixed charge debenture, it means the loan is secured against a specific asset such as your car, a piece of equipment or your business property. If you fail to pay back your loan, the lender has the right to take ownership of that asset in order to settle the outstanding loan balance.

With this kind of debenture, the lender may not allow you to sell whatever your loan is secured against, which could limit the way you operate your business until you’ve paid it off.

Floating charge debentures

Alternatively, you and your lender could agree on a floating charge debenture. With this type, your loan is not secured against a particular fixed asset but against an asset with a variable (but sufficient) value, for example your inventory. Even though the value of your inventory may change over the duration of the loan, the lender will have agreed that its value is high enough to act as security for the amount you have borrowed.

This kind of debenture leaves you free to trade and buy and sell stock as normal, despite the fact that the lender has your inventory as security. Once you pay off your loan, you’ll regain full control again.

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How can businesses raise funds using debentures

Issuing a debenture is like offering investors a long-term IOU. The process involves setting clear terms—interest rate, repayment date, and whether it’s convertible or not. For larger or more established SMEs, this can be an attractive alternative to issuing shares or taking out traditional loans.

But for smaller businesses or startups, a flexible business loan might be the better fit, since theyr'e quicker to access, have no need for legal structuring can scale up or down as needed.

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Example of debenture

You run a retail store and want to borrow a large sum of money from your bank to open a new shop. You plan to use your current premises as security against the loan.

You and the lender sign a fixed charge debenture which details the specifics of the loan, including the amount, interest rate, term length and the fact that the loan is secured against the business’ original premises.

If you pay back the loan according to the debenture terms, then no further action is taken. However, if your business goes into liquidation because you’re unable to pay your debts, the debenture would ensure that the lender is repaid before any other creditors.

Advantages and disadvantages of debentures for businesses

Debentures can be a smart move for raising funds without diluting ownership or tying up business assets. They’re especially useful for companies that have strong credit but want to avoid the rigidity of bank loans.

Pros of debentures

• No need for collateral, freeing up assets
• Long repayment terms, easing short-term pressure
• Fixed interest costs, aiding cash flow planning
• Convertible options can attract investors

Cons of debentures

• Higher interest rates due to lack of security
• Requires strong credit to secure favourable terms
• Adds debt to your balance sheet

Other types of debentures

On top of fixed and floating charge debentures, there are a number of other types of debentures that you might come across:

Secured debentures If you're in the UK, you're most likely to come across secured debentures. As above, this means the lender leverages a borrower's assets to provide security against the loan. If there is a default in repayment then the asset will be sold to pay off the debt.

Unsecured debentures Unsecured debentures, also known as ‘naked’ debentures, are not secured by any charge against the borrower's assets. It’s rare to come across unsecured debentures in the UK business environment.

Redeemable debentures Some debentures are redeemable, others are irredeemable. The former means that on a specific and agreed date, the borrower is legally bound to repay the debenture holder, or lender. This can be done in one lump sum or in instalments over an agreed period of time. An example of a redeemable debenture is a fixed term loan.

Irredeemable debentures On the other hand there are irredeemable debentures, which are also known as perpetual debentures. Under this kind of agreement there is no specific time of redemption, which means they continue until a company goes into the liquidation process. An example of this could be a business bank overdraft.

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How to invest in debentures and what to consider

If you're thinking about investing in debentures, it’s vital to look beyond the interest rate. Check the issuer’s credit rating, repayment terms, and whether it’s convertible into equity. You’re essentially betting on the company’s ability to repay without needing collateral.

• The company’s financial health
• Inflation risk (will your interest keep up?)
• Fixed vs floating rates
• Redemption terms (when you’ll get your money back)

They can be a steady income option, but you’re trusting the business to stay strong. As an investor or SME owner, weighing this risk is key.

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Are debentures a good investment for businesses?

For some businesses, holding debentures issued by others can be a way to earn regular interest while supporting strategic partners or industry peers. They can be less volatile than shares and may offer better returns than savings.

But they’re not without risk—particularly if the issuer’s creditworthiness changes. Unlike iwoca’s finance model, where you stay in control and can adjust your borrowing, debenture investments are locked in until maturity unless traded.

So if you’re investing your business’s funds, make sure you won’t need that cash short term.

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How do debentures compare to ordinary shares?

When you buy ordinary shares, you’re buying part-ownership and your returns depend on company profits and growth. Debentures, on the other hand, are debt: you lend money and receive fixed interest, but you don’t own part of the company.

Key differences:

• Shareholders get dividends (if declared); debenture holders get interest (fixed and contractual).
• Debentures rank higher in a bankruptcy—so they’re repaid first.
• Shares can grow in value; debentures typically don’t.

So if you're after growth, shares might appeal. But for stability, debentures may offer more predictability, especially if you trust the issuer.

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Can small businesses issue debentures?

In theory, yes. But in practice, it’s uncommon for very small businesses to issue debentures unless they’re well-established with a solid credit history. That’s because debenture issuance involves legal documents, investor confidence, and typically larger sums of money.

If your business needs fast, flexible funding without jumping through hoops, iwoca’s business loans could be a better fit. You can access up to £1,000,000, repay early without penalties, and scale borrowing as your business grows​.