A debenture is a document that gives a lender a charge over a borrower's assets as security for a loan. For the lender, it does not create new money — it creates a position: a fixed charge over named assets, a floating charge over a changing pool, or both. A charge improves the lender's place in the queue; it does not guarantee repayment.
What Is a Debenture, and What Does It Cover for a Lender?
What Is a Debenture?
The definition of the debenture varies from jurisdiction to jurisdiction. In the EU, a debenture would mean a secured creditor. In the US, a debenture means that the creditor is unsecured because a debenture is a bond that is attached to the loan given to the borrower based on their general creditworthiness. In the EU and the UK, a debenture is an instrument that gives the lender security through giving them a degree of control over some of the company’s assets.
That is why lenders who want to hold a debenture need to understand the legal context in their jurisdiction. Since the charges in a debenture may differ, including a fixed charge over a defined asset and the changing pool of assets called a floating charge. The lender therefore needs to understand what assets are covered and what model of a debenture they are more inclined to use.
Why does "debenture" mean an unsecured bond in the US?
"Debenture" means an unsecured bond in US terminology because it describes a corporate bond that has been backed by the borrower’s creditworthiness rather than by a specific asset pledged against the loan as collateral. That is why the important legal distinction between an EU and a US debenture holder arises — contrary to the EU, the holder of the debenture in the US is an unsecured creditor. That is why the recovery depends entirely on the assets available to reimburse unsecured creditors once all the other obligations have been met.
Fixed Charge vs. Floating Charge: What a Debenture Actually Covers
An identifiable asset within a determined category is what a fixed charge is attached to. A fixed charge can be attached to a real estate object, a vehicle, business equipment, or operational assets, provided that this category is specifically identified. The lender's security directly depends on the identified asset, and the borrower is therefore not allowed to unilaterally dispose of it without asking the creditor.
A varying pool of assets that can be modified and the charge attached to it is called a floating charge. One example of the floating charge would be a company's inventory in the hypothetical situation. If the company needs to sell one stock and acquire another one, and it does so, the pool attached to the floating charge has effectively changed. This way, floating charges may have either one or several assets in one pool attached to it.
What does a debenture cover?
A debenture can cover specifically identified assets through a fixed charge or the floating pool of assets through a floating charge. Likewise, the investor may combine these tools and have both. The table below summarizes the features of a debenture.
| Feature | Fixed charge | Floating charge | No charge (unsecured) |
|---|---|---|---|
| What is covered | Named, identifiable assets | A changing pool of assets | Nothing specific |
| Can the borrower deal with the asset freely | Generally no, without required consent | Yes, until crystallization | Yes, unrestricted by a charge |
| Priority at enforcement | Paid first from the named asset | Paid after fixed charges and certain preferential claims such as employee claims | Ranks with other unsecured creditors |
| What a lender can see before lending | A specific asset that can be valued | A changing asset category | No dedicated asset supporting recovery |
| Main risk for the lender | Asset value may follow the debt | The pool may shrink before crystallization and ranks behind fixed claims | Recovery depends on general assets |
This table describes general mechanics. Whether a specific arrangement is called a debenture, a charge, or something else — and how it ranks against other claims — depends on the jurisdiction and the loan agreement. This is general information, not legal advice.
Does a floating charge protect a lender the way a fixed charge does?
No, a floating charge does not protect a lender the way a fixed charge does. This happens because the holders of the fixed charges have priority in repayment. When the asset is sold, the holders of a fixed charge would be paid before the holders of a floating charge. Besides, the composition and the value of a floating pool in a floating charge may fluctuate, whereas the fixed charge against some asset remains stable. However, the floating charge is not rendered meaningless because it can give the investor more flexibility in the management of security mechanisms and, potentially, help with portfolio diversification.
Debenture vs. Charge: Are They the Same Thing?
A charge and a debenture are concepts related to one another, but they are not identical. A charge is the security interest that has been attached to an asset or the entire category of assets to provide additional protection of the lender. A debenture has a broader definition of an instrument that can be a pool of such charges or contain several of them at once.
One of the examples is that, supposedly, an investor purchases a fixed charge over the company’s commercial vehicle. This fixed charge would be one mechanism protecting this particular investment. Whereas a debenture may include the fixed charge for the machinery and the floating charge that the investor has bought to secure the assets that come in the form of inventory.
Retail investors may primarily find this distinction helpful, as it allows them to assess the assets standing behind the claim by understanding what rights the investor has if the payment stops either due to the borrower’s insolvency or some distortion of payment.
What Happens to a Debenture if the Company Fails?
A charge changes the lender's position in the queue, not the outcome: enforcement costs are deducted first, asset values can fall below the debt, and a floating charge in particular can leave a lender with only part of what was owed — or nothing.
In case a borrower fails, security affects the order in which available value is distributed, with the holders of fixed-charge debentures reimbursed first and floating-charge holders only after. The costs of the enforcement of the collateral as well as legal proceedings, commissions, and settlements may also affect the returns.
That is why floating-charge creditors usually occupy a weaker position because of their second-rank priority in case of a borrower’s inability to settle the debt and the subsequent enforcement procedure. Those investors who hold fixed charges may be more secured because of the priority of repayment, but security does not guarantee returns. Capital always remains at risk since the existing value of the collateral and, likewise, legal costs, may render the factual returns insufficient for complete reimbursement to a fixed-charge holder.
When it comes to completely unsecured lenders, they are the least protected. There is no asset backing the claim; that is why they will be repaid after all fixed-charge and floating-charge debenture holders have been reimbursed. Recovery is solely dependent on whatever amount remains after all the other creditors have been repaid.
What a Debenture Does Not Give a Lender
A debenture does not eliminate the credit risk coming from the borrower. Although a charge may give a lender another source of debt recovery, it in itself does not serve as the guarantee of such a recovery because of the priorities of repayment favoring fixed charge holders who are paid before floating charge holders and the considerations regarding legal fees and transaction costs that may affect the factual amount repaid.
Likewise, a debenture does not substitute for a due diligence process. On top of a debenture, a lender may need to consider the financial conditions of the borrower alongside existing liabilities and the quality of the collateral pledged against the loan. If a secured creditor is not guaranteed repayment, it may be because the value of the collateral and the recovery costs make the repayment amount lack the minimum to completely return the owed debt to the investor. Different priorities, with fixed charges paid first while floating charge holders paid after all the obligations in front of fixed charge holders have been set, also contribute to risk. Returns are not guaranteed.
FAQ
What is a debenture?
A debenture is a tool that recognizes and establishes the lender’s charge over the assets of the borrower. The charge is about repayment in case of the borrower’s default and as a security guarantee for debt collection, not about the income. A debenture can also mean an unsecured bond in US terminology.
Is a debenture the same as a loan?
No, a debenture is not the same as a loan. Instead, a debenture serves as a security instrument above the loan. The loan itself constitutes a separate lending agreement that defines the loan amount, the duration of the loan, and the interest rate, as well as all other terms.
What is the difference between a fixed and a floating charge?
A fixed charge is a specific named asset without the right of the borrower to dispose of it without the consent of the lender. It serves as an additional layer of security for the loan. A floating charge is another form of such a guarantee and is a variable pool of assets or funds that the borrower disposes of until crystallization.
What happens to a debenture if the company fails?
In case a company fails, debenture realization is different, depending on the type of the mechanism behind it. Fixed charge debentures are realized first to reimburse the holder of that debenture. Then, the floating charge holder receives whatever is left after legal, transaction, and other fees connected to debt repayment have been paid, and all fixed charge holders have been reimbursed.
Does a debenture guarantee a lender gets repaid?
No, a debenture does not provide a guarantee that a lender gets repaid. The charge may increase the priority of return, but the amount will depend on the price of the asset at the time of realization and the costs of debt recovery, including legal and transaction ones.
About Maclear
Maclear AG is a Swiss peer-to-peer (P2P) lending and crowdlending platform, headquartered in Switzerland. The company acts as a financial intermediary in the non-banking sector and is a member of PolyReg SRO, in accordance with Swiss financial regulations, particularly regarding AML, KYC, and GDPR. Maclear provides individual and qualified investors access to carefully selected business loan opportunities, with integrated risk assessment, a Provision Fund, and a Secondary Market for liquidity.
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