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Capital and financing

Loan capital

All companies have the implied power to borrow for the purpose of business.

Loan capital comprises all the longer term borrowing of a company such as:

 permanent overdrafts at the bank

 unsecured loans either from a bank or other party

 loans secured on assets either from a bank or other party.

Companies often issue long-term loans in the form of debentures.

A debenture is a document issued by a company containing an
acknowledgment of its indebtedness. The loan may or may not be
secured on the company’s assets.

All trading companies have the implied power to borrow for the purpose of their
business.

Advantages Disadvantages

 The board does not (usually) need  Interest must be paid out of pre-tax
the authority of a general meeting to profits, irrespective of the profits of
issue debentures. the company.

 As debentures carry no votes they  Default may precipitate liquidation
do not dilute or affect the control of and/or administration if the
the company. debentures are secured.

 Interest is chargeable against the  High gearing will affect the share
profit before tax. price.

 Debentures may be cheaper to
service than shares.

 There are no restrictions on issuing
debentures at a discount or on
redemption.

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