advantages and disadvantages of debentures
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Some of the advantages of using a debenture
Debentures ensure a higher position in the ‘pecking order’ for repayment as a creditor. Otherwise, the loan is unsecured - the position of unsecured creditors near the bottom of the payment hierarchy means a significantly lower chance of recovering any money.Valuable financial protection and reassurance is provided for directors as regards their personal funds.The use of debentures can encourage long-term funding to grow a business. It is also cost-effective when compared with other forms of lending.Debentures usually provide a fixed rate of interest for the lender, and this has to be paid before any dividends are issued to shareholders.Control of the company by existing shareholders is not reduced, and profit-sharing remains in the same proportion.
Are there any disadvantages?
As far as the company is concerned, there is no flexibility in their obligation to make interest payments on the debenture. In times of financial difficulty this can compromise business growth, and even force insolvency in some cases. Restrictions imposed by securing the debenture with an asset or asset class, takes away the management’s freedom to control or use the assets at will. By holding a debenture, the lender loses their right to vote and take a share of company profits.
Debentures ensure a higher position in the ‘pecking order’ for repayment as a creditor. Otherwise, the loan is unsecured - the position of unsecured creditors near the bottom of the payment hierarchy means a significantly lower chance of recovering any money.Valuable financial protection and reassurance is provided for directors as regards their personal funds.The use of debentures can encourage long-term funding to grow a business. It is also cost-effective when compared with other forms of lending.Debentures usually provide a fixed rate of interest for the lender, and this has to be paid before any dividends are issued to shareholders.Control of the company by existing shareholders is not reduced, and profit-sharing remains in the same proportion.
Are there any disadvantages?
As far as the company is concerned, there is no flexibility in their obligation to make interest payments on the debenture. In times of financial difficulty this can compromise business growth, and even force insolvency in some cases. Restrictions imposed by securing the debenture with an asset or asset class, takes away the management’s freedom to control or use the assets at will. By holding a debenture, the lender loses their right to vote and take a share of company profits.
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