Credit Score Basics > Does a debenture affect credit?

Does a debenture affect credit?

Wollit Team1 minute read · Updated 17th September 2024

In the UK, a debenture is a type of secured loan that businesses can get from lenders. If you own a small business or are thinking about getting this kind of financing, you might be wondering how a debenture can affect your credit score. Let’s have a look at what a debenture is, how it works, and how it affects your credit.

What is a debenture?

A debenture is a formal document that lays out the terms of a loan. It says how much money is being borrowed, the interest rate, and what assets the lender can take if you don’t pay back the loan.

A debenture basically gives lenders security over your business’ assets. If you don’t pay back the loan, the lender can take control of these assets.

Depending on the kind of asset we’re talking about, there are two kinds of debentures: fixed and floating debentures. A fixed debenture is secured against specific assets, while a floating debenture covers assets that may change over time, like inventory.

However, you should keep in mind that only limited companies or limited liability partnerships can get debentures; sole traders cannot.

How can a debenture affect my credit score?

The way debentures and credit scores are related can be complicated.

For businesses, having a debenture can affect their business credit score.

Taking out a debenture increases the total debt of the business. If this debt is managed well and payments are made on time, it can have a good effect on the business credit score. However, if your business doesn't pay back the debenture, it could really hurt its credit score. Lenders may see this as a sign of financial trouble.

For you as an individual, there are also implications.

If you personally guarantee a debenture for your business and if your business doesn't pay back the loan, you may have to pay it back yourself. Lenders may also take your assets and report missed payments to credit agencies. This could lead to a negative mark on your personal credit report if payments are missed – and a drop in your personal credit score.