Debentures and floating charges: what a lender actually takes when you borrow

Business borrowing arrives as a pack of documents, and attention is not evenly distributed across them. Everyone reads the interest rate. Most people read the personal guarantee, because it has their own name on it. Almost nobody reads the debenture, which is the document that determines what the lender owns if the company fails, what you can do with your own assets in the meantime, and whether the next lender will touch you.

It is worth twenty minutes, because a debenture is not boilerplate. It is the lender taking security over essentially everything the company has, now and in the future.

Fixed charges and floating charges

A debenture is a document creating charges over a company's assets in favour of a lender. It usually contains both types.

A fixed charge attaches to a specific, identifiable asset — a property, a piece of machinery, sometimes book debts. You cannot sell or otherwise deal with that asset without the lender's consent, and if the company fails the lender takes the proceeds of that asset first, ahead of virtually everyone.

A floating charge hovers over a shifting pool of assets: stock, raw materials, work in progress, cash in the bank, debtors. The point of it is that you can keep trading — buying and selling stock, collecting debts — without asking permission every time. On default or insolvency, the charge crystallises: it stops floating, fixes onto whatever is in the pool at that moment, and your freedom to deal with those assets ends.

Two clauses inside the document deserve particular attention. An all-monies clause secures not just the loan you are signing for but everything the company owes that lender, now or in the future — so the security given for a £40,000 term loan quietly also secures the overdraft and the card machine facility. A negative pledge prevents you granting security to anyone else ranking ahead of or equal to this lender, which is exactly the clause that blocks a second lender later.

The 21 days that decide whether it is worth anything

A charge created by a company must be delivered to Companies House for registration within 21 days of creation, under section 859A of the Companies Act 2006. Miss the window and the consequence is severe for the lender: under section 859H the charge is void against a liquidator, an administrator and any creditor of the company, and the money secured becomes immediately payable.

In other words, a lender who fails to register on time keeps the debt but loses the security, dropping to the back of the queue as an unsecured creditor. Lenders rarely miss it. The reason it matters to you is the flip side: registered charges are public. Anyone can look up your company at Companies House and see who has security, over what, and from when — which is precisely what the next lender does before deciding.

A debenture does not just secure the money you have borrowed. It publicly reserves your company's future assets for one lender, and every subsequent lender can see it.

Where the money actually goes if it fails

This is the part almost nobody understands until it is happening, and it explains why floating charges are worth much less than borrowers assume.

In an insolvency, proceeds are distributed in a fixed order. Fixed charge holders are paid from the proceeds of their specific assets first. Then the insolvency practitioner's costs. Then ordinary preferential creditors — principally employees, for unpaid wages within limits and accrued holiday pay. Then secondary preferential creditors, which since 1 December 2020 means HMRC for VAT, PAYE, employee National Insurance, CIS deductions and student loan repayments collected from others. Then the prescribed part, a slice of the floating charge realisations ring-fenced for unsecured creditors: 50% of the first £10,000, plus 20% of the remainder, capped at £800,000 for charges created on or after 6 April 2020. Only then does the floating charge holder get paid, and unsecured creditors share whatever is left.

Work an illustrative example. A company fails owing a bank £250,000 secured by a debenture, HMRC £90,000 in VAT and PAYE, and trade suppliers £160,000. Floating charge assets — stock and debtors — realise £200,000 after the insolvency practitioner's costs. Employees are owed £15,000 preferentially, leaving £185,000. HMRC's secondary preferential claim of £90,000 comes next, leaving £95,000. The prescribed part takes 50% of the first £10,000 (£5,000) plus 20% of the remaining £85,000 (£17,000), so £22,000 goes to unsecured creditors. The bank receives £73,000 against its £250,000.

The bank then does the obvious thing and calls the personal guarantee for the £177,000 shortfall. That is the real relationship between the two documents: the debenture determines how much of the debt the company's assets can cover, and the personal guarantee determines who pays the rest. Directors who assume the security means the guarantee will never be called have the arithmetic backwards.

What it means while you are still trading

Three practical consequences, none of them dramatic, all of them worth knowing.

You cannot freely dispose of charged assets. Selling a van or a piece of plant that sits under a fixed charge without consent is a breach of the loan agreement, and the consent is normally given — the problem is only that people forget to ask.

You cannot easily borrow from someone else against the same assets. A negative pledge, plus a registered charge visible on the public record, means a second lender is either refused or has to negotiate a deed of priority with the first. This is the most common reason a business with real assets is told no by an invoice finance provider, and it is worth checking your own filing history before applying: it is exactly the kind of thing a lender examines before approving anything.

And when you repay, the charge does not disappear on its own. The lender should file a statement of satisfaction at Companies House, but the obligation is not automatic and stale charges routinely sit on registers for years, blocking future borrowing. When you clear a facility, ask in writing for the charge to be released and then check the register yourself.

What to ask before you sign

Four questions get you most of the way. Does this secure only this facility, or is there an all-monies clause? Which assets are under fixed charge and which are floating? Is there a negative pledge, and will it stop the invoice finance or asset finance I might want next year? And what specifically counts as an event of default — because for many small-business facilities the triggers include breaching a covenant or missing a single payment, which is a much lower bar than most borrowers assume when they think about what would ever go wrong. Missing a repayment is not just an interest problem; it is the switch that lets everything else in the document happen.

Common questions

What is a debenture?

A debenture is the document a company signs granting a lender security over its assets. It typically creates a fixed charge over specific identifiable assets such as property or machinery, and a floating charge over changing assets such as stock, debtors and cash. It also contains operational terms — an all-monies clause securing everything the company owes that lender, a negative pledge preventing further security being granted to others, covenants, and a definition of what counts as an event of default. It must be registered at Companies House within 21 days of creation and is then publicly visible on the company's filing history.

What is the difference between a fixed and a floating charge?

A fixed charge attaches to a specific asset, and the company cannot sell or deal with that asset without the lender's consent; the lender takes the proceeds of that asset ahead of nearly everybody in an insolvency. A floating charge covers a shifting pool of assets — stock, work in progress, debtors, cash — which the company can keep trading with freely until the charge crystallises on default or insolvency. The practical difference is priority: floating charge holders rank behind insolvency costs, preferential employee claims, HMRC's secondary preferential claim and the ring-fenced prescribed part, so they frequently recover only a fraction.

Does a debenture stop me borrowing from another lender?

Usually it makes it much harder. Most debentures contain a negative pledge preventing the company from granting security ranking ahead of or alongside the existing lender, and because registered charges are public at Companies House, any prospective lender sees the position immediately. A second lender will normally either decline, lend unsecured at a higher rate, or require a deed of priority negotiated with the first lender. This is a common reason an otherwise creditworthy business is turned down for invoice or asset finance, so check your company's registered charges before applying rather than after.

What happens to a debenture after I repay the loan?

It does not fall away automatically. The lender should file a statement of satisfaction at Companies House recording that the charge has been discharged, but this is not always done promptly and old charges commonly sit on company records for years. Because prospective lenders read the register rather than your loan statements, a stale charge can block or delay future borrowing and complicate a sale of the business. When you clear a facility, ask the lender in writing to release the charge, then check the company's filing history at Companies House yourself and chase if it has not been updated.