Debenture and Facility Agreement: Understanding the Basics
If you are a business owner, you may need to raise funds at some point in time to expand your business, invest in new projects, or to meet your short-term financial obligations. Debentures and facility agreements are two common options for raising funds, but what exactly are they? Let`s dive into the basics:
Debentures:
A debenture is a long-term debt instrument that is issued by a company to raise funds. It is similar to a bond but differs in terms of the security provided to the investor. Debentures can be secured or unsecured. In case of secured debentures, the company pledges some of its assets as collateral to secure the debt. Unsecured debentures, on the other hand, are not secured by any collateral.
Debentures usually have a fixed interest rate, which is paid to the investor at regular intervals, and have a specific maturity date, which is the date on which the principal amount is repaid to the investor. Debentures can be issued to individual investors, institutional investors, or can be listed on a stock exchange.
Facility Agreement:
A facility agreement is a legal document that sets out the terms and conditions of a loan facility provided by a lender to a borrower. It is a contractual agreement between the lender and borrower, outlining the rights and obligations of each party. A facility agreement can cover a wide range of loan facilities, such as term loans, working capital facilities, asset-based lending, and more.
The facility agreement sets out the loan amount, interest rate, repayment schedule, and any other terms and conditions that the lender and borrower agree upon. It also includes provisions for events of default and remedies in case of default.
Debentures and Facility Agreement:
Debentures and facility agreements are closely related as debentures can be issued under a facility agreement. A facility agreement can include provisions for issuing debentures as a means of raising additional funds for the borrower. In this case, the debentures are issued to the lender as part of the loan facility.
The facility agreement also outlines the terms and conditions of the debentures, such as the interest rate, repayment schedule, and any security provided by the borrower.
Conclusion:
Debentures and facility agreements are essential tools for businesses looking to raise funds. Debentures provide a long-term source of finance that can be secured or unsecured, while facility agreements detail the terms and conditions of a loan facility provided by a lender. Together, they provide an effective means of financing for businesses of all sizes. Understanding the basics of debentures and facility agreements can help you make informed decisions when it comes to financing your business.