Glossary

Irredeemable Debentures

Irredeemable Debentures

Looking to find your feet when it comes to alternative forms of commercial finance? If a bank loan or credit card can’t quite provide the amount you need, where do you turn? Well, there’s no shortage of options available to you. It’s just that choosing the right one can be crucial. In the case of an irredeemable debenture, it’s no different either.

Are you at ease with the idea of debt financing to move forward on your business journey? If so, an irredeemable debenture could be the solution you need. But this, of course, means it’s important that you know what it involves. In this useful guide, we’ll introduce you to the basics of this funding solution – and what you need to know if you’re considering it.

What is an ‘irredeemable debenture’?

As you’ll no doubt gather from its name, we’re talking about a specific type of debenture.

In short, the debenture (irredeemable or otherwise) isn’t actual funding in and of itself. The financial support you receive comes in the shape of the loan. What your debenture does, however, will be to define that loan as a written agreement. In it, the details of your loan are set out – such as the amount you owe, the interest rates and any security offered.

One other detail that a debenture can also include is the date on which a company must repay what it owes. However, that only applies to redeemable debentures.

An irredeemable debenture, therefore, is the opposite of this. The agreement doesn’t include a date on which the lender will ‘redeem’ the amount owed. Instead, there is no defined period. It means that the loan period will only end after a long time – or if a borrowing business stops trading. You may hear it called a ‘perpetual’ debenture for that reason, too.

Can a company issue an irredeemable debenture?

Yes. It depends on the specific circumstances, and the lender and borrower both need to agree that a debenture will be irredeemable. If that happens, a company can issue it. There are some countries in which this isn’t possible, however.

How can I use the funding provided?

It’s uncommon for an irredeemable debenture to include terms on what a loan can or cannot be used for. As such, that likely leaves you free to use the finance as you see fit. 

−      Do you need – or would you like – to upgrade your tech systems or equipment?

−      Is there a window to expand into extra market areas, or even explore overseas?

−      Have you outgrown your current location or need more output/storage capacity?

A loan that’s backed by an irredeemable debenture can be worth a significant amount of money so it can be well-suited to long-term growth plans. For short-term matters such as cash flow or stock supply, there could be more appropriate options worth pursuing for your business.

Irredeemable debentures: How do they work?

Once you have a lender willing to provide you with the funding you need, the terms will be set out in writing. The main detail is the amount being borrowed by your business but it’ll include the interest rate and confirmation of the assets being used as security, too.

Of course, an irredeemable debenture must not have a specific date on which a loan is repaid.

The document will be registered with Companies House with 21 days of being agreed. You get the funding you need, and the lender gets its assurances. In practice, this means that a lender will be among the first creditors to be paid if your company becomes insolvent or stops trading.

Benefits and downsides of irredeemable debentures

No form of business finance is 100% risk-free. Even the extra safeguards with an irredeemable debenture for both lender and borrower can’t take away all of the potential pitfalls. The only way that you can ever truly know if it’s the right option for you is by balancing out the pros and the cons.

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The advantages

  • It can be a really effective way to secure the funding you need. In particular, it can make a lender more willing to provide you with a larger amount of finance and help to support your growth.
  • The terms are in no doubt once you agree to them, so you can be clear about what you’ll be expected to do as the borrower.
  • An irredeemable debenture means that the loan has no maturity date. As such, you won’t need to pay back what you borrow by a set date. Instead, the loan period will last in perpetuity until some point long into the future.

The disadvantages

−      Your business is bound by the terms of the loan agreement indefinitely. It’s only when the loan is repaid that you no longer have to stick to what’s agreed.

−      If you have a fixed charge debenture, the above point means that you won’t be able to sell assets used as security. That could mean missing out on future opportunities. It might even be crucial in your ability to unlock future funding when the need arises.

Am I eligible for an irredeemable debenture?

As covered in our main look at debentures, limited companies and limited liability partnerships can be covered. Sole traders and standard partnerships are excluded – so that could rule out your business from the outset.

It’s then a question of whether you can find the right lender. Can you secure the funding your business needs? Do you have enough value in your assets to offer as security? These are just some of the questions that will help you determine if you can benefit from this solution.

Is it the right option for my business?

Our guide to irredeemable debentures hopefully puts you more in the picture about what they are and what’s involved. And it might also mean that you’re better informed when deciding if it’s a solution that suits your business. The decision must always be unique to you; after all, there is no one-size-fits-all approach to business growth.

If an irredeemable debenture doesn’t fit the bill in terms of your business, be sure that you explore the wide range of alternatives. Why not start here with Nucleus? Our seven dedicated business funding products can provide you with support worth from £3,000 right up to £50m.

The first step is to get in touch. Don’t worry – there’s no obligation. What we’ll do, however, is talk to you about your business and what it needs. We can then give you a tailored quote. You can take it or leave it. But we have a proven track record in helping the UK’s SMEs to grow – and our funding specialists are ready to help yours do the same.

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