AS A Level Business: Introduction To Debentures

In addition to raising capital (money) using shares,
Companies also often raise money by issuing (selling) debentures
While shares are considered as a part of (or a unit of) capital debentures are considered a loan
A debenture can there be defined as a loan stock that is issued by a company to creditors in exchange for funds
Usually, it takes the form of promissory note where the issuing company promises to pay the creditor who is lending them funds the specified amount after the specified period has lapsed
The word debenture is simply used to describe that document or certificates that acknowledge said loan
The word debentures is also used to refer to the total amount the issuing company has borrowed this way
Debentures are creditors to the company and are, in the event of liquidation,
The first to receive their monies.
They usually earn a fixed rate of interest on the amount that they have given to the company
For example, a 7% debenture earns a rate of 7 cents for each dollar the company borrowed
Debentures are typically redeemable or at least convertible (see below for definitions to these terms)
Just like shares debentures are also traded publicly on the financial markets

These can be converted into one form of stock or another for example into ordinary shares,
This conversion is usually at the discretion of the of the debenture holder at a predetermined future date
The rate is often agreed upon by the issuing company and the debenture holder when the debentures are issued out
For example, Debentures can have the option to be converted into either Ordinary or Preference shares after a certain date

These are also known as simple debentures,
They are issued without security and are only backed by the issuing company’s word that they will repay the borrowed amount
They are unsecured and not tied to any specific asset within the issuing company
These debentures are considered insecure in the event of liquidation since they have to wait in line with other creditors although they are entitled to receive their money before the shareholders
While they may seem undesirable at first glance in reality
These types of debentures are backed by the reputation and integrity of the borrower
This might be enough for trusted businesses that are large, well known, of sound financial standing
Examples include Multinational companies and big technology entities such as Google, Alibaba etc

Such debentures are secured by floating amounts on all the assets of the company
Such assets may be buildings, land, other fixed assets or movable assets such as motor vehicles etc
These debentures are typically secured on unspecified assets of the business
The understanding is that if the company defaults some of its assets will be sold to settle that debt
Unlike mortgage/fixed debentures the debenture holder does not place any restrictions on the borrowing company’s use of the assets used to secure the debenture loan

these debentures are secured on the more permanent assets of the company such as Plant Property and Equipment or Buildings
They are sometimes also known as fixed debentures
Fixed debenture holders often place restrictions upon the borrowing company’s use of the assets upon which the debenture loan is secured
Often these restrictions prevent the company from selling the asset without the approval of the debenture holders

To access more topics go to the Advanced Level Business Studies page

AS A Level Business: Introduction To Debentures- Updated 2024