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What Is a Mortgage Debenture?

Jim B.
By
Updated May 16, 2024
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A mortgage debenture is a legal document given by a borrower to a lender that usually gives rights of some asset held by the lender to the borrower if the loan is not repaid. This type of debenture is generally demanded by a bank that is giving a loan to a business. In essence, the mortgage debenture gives the bank the rights to assets, ranging from physical property to unpaid invoices, to the business itself. There are also occasions where this type of debenture may give the bank the right to step in and appoint a receiver to take charge of the business assets as a way of ensuring repayment.

Business loans are a common necessity for young companies in need of funds to get their operations underway. They may also be utilized by companies that are well-established but are embarking upon a costly new initiative. Some of these loans may be unsecured, but many banks require some sort of collateral from the borrower to securitize substantial loans. One type of collateral that may be accepted is a mortgage debenture.

The mortgage debenture is a document signed by the borrowers and provided to the lender. In the case of a business loan, the company doing the borrowing must promise both to repay the principal of the loan to the bank at the completion of the term of the loan and to provide interest payments to the bank at regular intervals. On top of all this, some security must be provided to compensate the bank for the risk that the loan might not be repaid.

Depending on the type of mortgage debenture agreement, different forms of collateral may be accepted. Often, the bank can lay claim to the building holding the business or to other valuable physical assets the company may own. The bank might also be able to lay claim to any debts owed to the business in the form of customer invoices. In addition, a floating charge included in some debentures would entitle the bank to future earnings the business might be able to realize.

There are also occasions where a mortgage debenture might provide the bank the right to step in and essentially take charge of all the business assets owned by the borrowing company. This might even encompass the bank taking over collection of money owed to the company in question. It is important to realize that none of these rights can be executed by the bank if the borrowing company keeps up with its loan repayment schedule.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.
Discussion Comments
By Telsyst — On Jan 31, 2014

Issues surrounding liens and collateral are among the most common source of dispute between a debtor and a lender.

As a result, a potential borrower should have a lawyer to represent them in negotiating loan terms.

Never assume that the fine print related to collateral is just boiler plate language in any loan document. Be sure you know exactly what the lender's rights are in case of default and what the consequences could be for you or your business.

Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
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