The next step

To Companies House on registering a debenture

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How to protect your business investment

Your money at risk

There’s always a risk to your personal finances when you own a business and an even greater one when starting a new company. You can protect your cash to some degree by lending start-up capital to the business rather than investing it all as share capital. By itself this won’t help much if the business fails as you’ll still be next to last in line when the company’s remaining assets are dished out to creditors.

Added security

The way to push yourself to the very top of the list of creditors when a company is wound up is to add security to your loan. This can be done by creating a debenture.

Fixed or floating

A debenture is simply a written agreement between you and your company giving you the right to receive the proceeds from the sale of the company’s assets if it can’t repay your loan by any other means. A debenture can be fixed, floating or usually both. A fixed debenture is secured on capital assets such as business premises and equipment, whereas a floating debenture relates to stock and similar circulating assets.

Tip. A floating debenture can protect you where the amount of money you’re owed varies.

Example. For tax reasons you take a salary from your company, but because you don’t want to deprive the business of working capital you don’t draw the cash. This increases the amount the company owes you, but the good news is that your floating debenture can automatically protect the increased debt meaning you’ll get paid before trade creditors and even anything your company owes to HMRC.

Setting up a debenture

As mentioned, a debenture must be a written agreement. An oral one is no good because to be valid a document must be registered at Companies House within 21 days of it being approved (executed) by the lender and borrower (see The next step ). Drawing up the agreement is probably a job best done by a solicitor who specialises in commercial matters.

Get your timing right

To be cast iron you should set up a debenture at the time you make the loan. The agreement can include reference to variations in the balance in the type of situation shown in our example. While debentures set up after a loan is made are still valid, they might be challenged by the receiver if the company goes into liquidation, especially if at the time of the loan the company was in trouble.

Tip. If you’ve made an unsecured loan to your company, and the business is currently in good shape, a debenture is still a good idea even though the timing is not perfect. A receiver is not likely to challenge a debenture where there’s no indication that the company is in danger or struggling financially.

For information on registering a debenture, visit http://tipsandadvice-business.co.uk/download (CD 16.20.07).