Debentures vs. Loan

Difference Between Debentures and Loan

When a company needs a large amount of money for expansion, there are many ways to raise capital for the purpose. One of these financial instruments is debentures. It’s a way to invite the public to subscribe for its range of attractive rates of interest on certificates issued by the company. These certificates are called debentures and are a type of unsecured loan as the company did not need to give any guarantee to people subscribing to these debentures. Although still technically a type of loan from the public, these debentures differ from conventional loans that companies take advantage of the banks or other financial institutions. This article will discuss the differences between the debentures and the loan.

The debenture is a note of thanks, a certificate issued by a company to lenders that offer loan to the company in exchange of the fixed rate of interest for a long term. These bonds bear the seal of the company and contain the details of the contract for the repayment of the principal sum on a date after the time period of the debentures with the payment of interest at a rate which is also specified in the certificate. The obligations are the responsibility of the company and are reflected as such in the financial statements of the company.

A company treats it just deals with the obligations of the bank loans capitalized by this and together they are the debts of the company. These are debts that must be repaid by the company. The important difference between bank loans and loans borrowed by the general public the company is that the bonds are unsecured loans that do not have any security and the company admits those loans only in the form of certificates issued by the company to debenture holders. Another remarkable difference is that loans are not transferable when a person can transfer any obligation on behalf of another person so they are transferable.

 

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