A debenture is a term which refers to long term debts or loans made by a borrower / borrowers which are unsecure and which are not backed by collaterals as common practice in other types of loans. Debentures are usually issued based on the credit worthiness of the institution seeking the loan, qualified by the entity’s earning power, bond ratings and their reputation among other factors. The documentation sealing a debenture is called an indenture. Debentures are not issued by individual persons, but rather by financially strong companies or groups such as corporations and governments.
The borrower is the party responsible for issuing a debenture, and the lender is the debenture holder. There is a fixed interest applicable to the loan, which the debenture holder will get over the duration of the agreement, much like in normal bank loans. In case of bankruptcy in the case of the debenture issuer, the debenture holder is considered a general creditor. The good thing about debentures in the case of the borrower is that assets are not turned as collaterals (they are unencumbered) and are they therefore open to subsequent financing.
There are several types of debentures, including corporate debentures, bank debentures, convertible debentures, government debentures, subordinated debentures, and exchangeable debentures.