What is a debenture? Fixed and floating charges explained

Directors usually meet the word debenture in a loan offer, often with little explanation. This guide explains what you are signing, how the two kinds of charge work, what happens if the business fails, and how a debenture affects the next facility you want. It is written for directors of limited companies and members of LLPs. Smart Funding Solutions is a broker, not a lender: we arrange funding from around £10,000 to £500,000+, with larger facilities available in suitable cases, and we see debentures in most secured, asset-based and larger unsecured facilities placed with lenders on our panel. For related topics, browse our guides to business borrowing.

01Two meanings of debenture

Historically, a debenture meant any written acknowledgement of a debt by a company, and the word is still used for loan stock issued to investors. In everyday SME lending, it means something narrower: the security deed that gives a lender charges over the company's assets. That is the meaning used here.

A typical debenture is sometimes called an all-assets debenture, because it combines fixed charges over everything that can be pinned down with a floating charge over everything else.

02Fixed charges

A fixed charge attaches to a specific asset. The company cannot sell, lease or charge that asset again without the lender's consent. Common subjects of a fixed charge include:

• Freehold and long leasehold property (often also protected by a separate legal charge registered at HM Land Registry)
• Plant and machinery identified in a schedule
• Goodwill, intellectual property and uncalled capital
• Shares the company holds in subsidiaries
• Book debts, if the lender controls how the money is collected

The last point trips many businesses up. Courts have held that a charge over book debts is only truly fixed if the lender controls the proceeds, for example through a blocked account. If the company can pay customer receipts into its ordinary account and spend them, the charge is treated as floating, whatever the document calls it. This is why invoice finance providers structure their collection accounts carefully.

03Floating charges

A floating charge covers a class of assets that changes in the ordinary course of trading: stock, raw materials, cash at bank, and any assets not caught by a fixed charge. The company can buy and sell those assets freely without asking the lender.

The charge floats until it crystallises. Crystallisation usually happens when the company enters liquidation or administration, when a receiver is appointed, or when an event named in the debenture occurs. At that point the charge fixes onto whatever assets are in that class at that moment, and the company can no longer deal with them.

A floating charge over the whole or substantially the whole of a company's property is known as a qualifying floating charge. It gives the lender the right to appoint an administrator without a court hearing, which is one of the main reasons lenders ask for one.

04Fixed and floating charges compared

Feature	Fixed charge	Floating charge
Assets covered	Specific, identifiable assets	A changing class of assets
Can the company sell the asset?	Not without the lender's consent	Yes, in the ordinary course of business, until crystallisation
Ranking in insolvency	Paid from the charged asset before anyone else	Paid after insolvency costs, preferential creditors and the prescribed part
Who can grant one	Companies, LLPs, and individuals over specific assets such as property	Companies and LLPs; generally not sole traders or ordinary partnerships

A floating charge covers a class of assets that changes in the ordinary course of trading: stock, raw materials, cash at bank, and any assets not caught by a fixed charge.

05Registering the charge at Companies House

A charge created by a company or LLP must be registered at Companies House in a 21-day period beginning with the day after it is created, usually by the lender's solicitor filing form MR01 with a certified copy of the deed. GOV.UK sets out the process in its guidance on how to register a charge for a limited company.

If a charge is not registered in time, it is void against a liquidator, administrator or other creditor, and the money it secured becomes immediately repayable. Late registration requires a court order. For the borrower, the practical point is that every registered charge is public: anyone checking your company, including other lenders, suppliers offering credit and credit reference agencies, will see it. Our guide to what goes into a company credit report explains how charges appear.

When a debt is repaid, the charge stays on the register until a statement of satisfaction (form MR04) is filed. Old, satisfied charges still showing as outstanding are a common cause of delay when a new lender is carrying out checks. You can see your own company's charges free through the Companies House register search.

06Where the lender ranks if the company fails

This is the point of a debenture. In a liquidation or administration in England and Wales, realisations are broadly applied in this order:

1. Fixed charge holders, from the proceeds of the assets they have a fixed charge over.
2. The costs of the insolvency.
3. Preferential creditors: certain employee claims, then HMRC for VAT, PAYE and employee National Insurance deducted but not paid over.
4. The prescribed part: a share of floating charge realisations ring-fenced for unsecured creditors, capped at £800,000 for charges created since April 2020.
5. Floating charge holders.
6. Unsecured creditors, including most suppliers.
7. Shareholders.

The Insolvency Service's technical guidance on distributions gives the detail. The practical lesson is that a floating charge alone offers a lender less than it appears, because several groups are paid first. That is why lenders often pair a debenture with a legal charge over property, or with personal guarantees from directors.

07Which lenders ask for a debenture

• Banks, for overdrafts, term loans and revolving credit facilities.
• Invoice finance and asset-based lenders, who need a fixed charge over book debts and often a floating charge over stock.
• Acquisition lenders, over both the buying company and the target.
• Some lenders of larger unsecured business loans, where "unsecured" means no property charge but an all-assets debenture is still taken.
• Mezzanine lenders, who take a second-ranking debenture behind the senior lender. See mezzanine finance.

Hire purchase and leasing lenders usually do not need one, because they own the equipment until the final payment; asset finance sits outside the debenture for that reason. For the wider trade-offs between offering security and not, see secured versus unsecured loans.

08Clauses to read before you sign

• All-monies clause. The debenture usually secures everything the company owes the lender now or in future, not just the loan in front of you.
• Negative pledge. The company promises not to create any other security without consent. Breaching it is an event of default.
• Restrictions on disposals. Selling a property, a vehicle fleet or a division may need the lender's written agreement.
• Events of default and crystallisation. Missed payments, covenant breaches, a winding-up petition or a judgment against the company can trigger the lender's rights.
• Further assurance and power of attorney. The lender can require further documents and sign them on the company's behalf if it enforces.

09Borrowing from a second lender

A debenture does not stop you borrowing elsewhere, but it shapes how. A second lender will want to know where it ranks. The usual solutions are:

• A deed of priority or intercreditor agreement between the two lenders, setting out who is paid first from which assets.
• A waiver from the existing lender releasing specific assets, commonly book debts so that an invoice financier can take a first fixed charge over them.
• Refinancing the existing lender out entirely, so its charge is satisfied and a single new lender takes security. Our page on refinancing business loans covers when that makes sense.

Negotiating these documents takes time. Build it into your timetable, particularly if you are adding an invoice facility alongside an existing bank overdraft.

10Sole traders, partnerships and Scotland

Sole traders and ordinary partnerships generally cannot grant floating charges, so lenders to unincorporated businesses rely on charges over specific assets, such as property, and on personal liability. Farmers have a separate statutory regime for agricultural charges. In Scotland, companies can grant floating charges, but fixed security over land takes the form of a standard security and other assets need their own Scottish forms.

11What lenders check on your existing charges

Before offering terms, a new lender reads your security position as closely as your accounts:

• The charge register: every charge filed against the company at Companies House, and whether old ones were ever marked as satisfied.
• Who ranks first: which existing lender holds a fixed charge over which assets, and whether a floating charge was created first.
• Restrictive clauses: a negative pledge or all-monies wording in an existing debenture that would need the current lender's consent.
• The assets left over: what book debts, stock, plant or property remain realistically available as security once prior charges are taken into account.
• Guarantees behind the debenture: any personal guarantees already given to the existing lender, which add to the directors' exposure.

12Documents to have ready when security is involved

13How we help