Debenture vs Loan
When a company needs a large amount of money for its expansion, there are many ways to raise capital for the purpose. One of these financial tools is called debentures. This is a way of inviting general public to subscribe to its offer of attractive rates of interest on the certificates issued by the company. These certificates are called debentures and are a type of unsecured loan as company does not need to give any collateral to the people subscribing to these debentures. Though technically still a type of loan from the public, these debentures differ from ordinary loans that companies avail from banks or other financial institutions. This article will talk about the differences between debenture and loan.
Debenture is actually a note of thanks, a certificate issued by a company to the lenders who pledge loan to the company in lieu of fixed rate of interest for a long term. These debentures carry the seal of the company and contain the details of the contract for the repayment of the principal sum at a specified date after the tenure of the debenture along with the mode of payment of interest at the rate which is also specified in the certificate. Debentures are liability of the company and are reflected as such in the financial statements of the company.
A company treats debentures just at it treats bank loans availed by it and together they constitute the debt liability of the company. These are debts that need to be repaid by the company. The major difference between bank loans and the loans lent by general public to the company is that debentures are unsecured loans that do not carry any collateral and the company only acknowledges these loans in the form of certificates issued by the company to debenture holders. Another notable difference is the fact that loans are non transferable whereas a person can transfer debentures in the name of another person so they are transferable.
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In brief: Debenture vs Loan • Debentures are capital raised by a company by accepting loans from general public. In return, the company promises to return the principal amount at a specified date later and also promises to pay a fixed rate of interest to the lenders. • Debentures are transferable while loans are not. • Debentures do not need any collateral from the company whereas loans need collateral.
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