Pros and cons of debentures
Pros of debentures
Pros for the lender
Debentures can be financially rewarding for investors because they pay interest – usually at a much higher rate than bonds or other investments. Another benefit to investors is that convertible debentures can be exchanged for shares. Lastly, debentures are transferrable between financiers, so an investor does not have to hold onto the debenture if they don’t want to.
Pros for the borrower
Debentures provide funds for the company or individual, and the loans are not restricted in terms of how much they can borrow – unlike regular loan options.
Cons of debentures
Cons for the lender
Debentures carry different types of risk, including interest rate risk and inflationary risk. Because debentures are repaid on a fixed interest basis, the lender may lose out if interests rates rise. Furthermore, interest payments may not be in line with changing inflation.
Cons for the borrower
The downside for the borrower is that they have little financial flexibility because the interest payments are compulsory. And, if they cannot repay the loan, they may suffer other losses, as outlined in the indenture. This means that the company who issues the debenture may lose more than they borrowed.