Debt Capital

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Debt Capital

In most cases, a company can raise all the capital it needs through the sale of shares. However, in many companies, this will not be the case, and the company will need to obtain capital through borrowing it from others. 

The document by which a company creates or acknowledges a debt is known as a debenture. 

S 738 states that debentures can be secured or unsecured. 

A company can often raise significant capital by issuing debenture stocks. The holder is a creditor and so is entitled to interest on the loan, but will not receive profits via a dividend. 

A prudent lender will insist on some kind of security over the company's assets in the event that the company is unable to pay the loan. 

Where a loan is secured over the company's assets, the loan is secured. A further benefit of having security over a loan is that the secured creditors have the right to be paid before the unsecured creditors. As insolvent companies have limited assets, this is an extremely important advantage. 

Charges

Any form of security where possession of property is not transferred will be classified as a charge. 

The creditor who obtained the charge is called the chargee, and the borrower who granted the charge is the chargor. There are two main types of charge, namely fixed and floating charges. 

Fixed Charges

The simplest form of charge is the fixed charge, which is fixed over an identifiable asset of the company, such as a building, vehicle or piece of machinery. 

Should the debtor company default on the loan, the creditor can look to the charged asset to satisfy the debt, usually by selling it and recovering the proceeds of sale. 

The most common type of fixed charge is a mortgage. The mortgage is secured over the building and so this can be repossessed and sold in the event of a default. 

Floating Charges

Fixed charges can be inflexible as they limit the debtor's ability to use a certain asset. Assets that fluctuate are therefore not appropriate for a fixed charge. A more flexible form of charge was therefore required, leading to the creation of a floating charge. 

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