What Are Debenture Loans?

Businesses and other entities, such as governments, often require some form of finance in order to carry out their activities. There are many means for obtaining these finances, which may include bank loans or debentures. Debenture loans are instruments that serve in the same capacity as ordinary loans with a few notable exceptions. The main reason for obtaining debenture loans is to help tide the company or entity over until an agreed-upon period has elapsed, all depending on the terms and conditions stated in the agreement between the issuer of the debenture and the person holding it.

Debenture loans are a very limited sort of equity investment in a company or a project in the sense that the person or organization issuing the loan does so with the intention of helping the company achieve stated aims, while at the same time gaining some form of benefits from the arrangement. The benefits gained by holders of debenture loans are mainly in the form of strictly set interest rates that must be repaid consistently over time until the agreed time for the expiration of such debenture loans have expired. For instance, if the debenture loans have been set to expire at the end of five years, the holders will be paid interests over the length of time for the loans, and they also have peace of mind by knowing that such interests must be paid even before the company can pay other financial obligations like the payment of dividends. The loan holders also have the assurance that if anything should happen to the company and it folds, they will have a sort of priority in the repayment of the financial obligations of the distressed company, especially if the debenture has been secured.

Debenture loans are not shares due to the fact that such loans are limited and only give the holder certain really limited rights in terms of the affairs of the company. This is unlike the rights of identified shareholders in a company who have stated rights in terms of the running of the company and contributing to the affairs of the company. These loans are usually offered on the condition of the provision for some sort of security from the issuer of the debenture in terms of an asset that the holder of the debenture loan can lay claim to if the issuer of the debenture should default.