Debt finance is when a company finances its trading by borrowing money. There are several different kinds of debt finance, and many are governed by contract law rather than company law.
A ‘term loan’ is a fixed amount of money borrowed from a bank or other lender for a specified time, often with significant conditions attached.
A ‘debenture’ is a loan agreement in writing between a borrower and a lender that is registered at Companies House.
A company can also obtain debt finance secured against its assets using different types of security.
A lender can take a mortgage over high-value assets owned by the business, such as land, buildings or machinery etc.
A charge gives the lender contingent rights over property in the even that the company is unable to repay the money.
- A fixed charge gives the lender the right to sell a particular asset if the borrower does not pay.
- A floating charge gives the lender rights over a group of assets, such as stock, that is constantly changing. The company can continue to use these assets until the charge is due.
Book debts are money owed to the company or LLP by its debtors, and can be charged as an asset.
Directors or partners can also give a personal guarantee to secure a loan, making them liable if the company is unable to repay the funds.
The debtor can also deliver an asset physically to the creditor as a pledge to serve as security until the debt is repaid.
Finally, a lien gives a creditor the right to physical possession of the debtor’s goods or assets until the debt is paid.