Answer Posted / sarvjeet

Both Debentures and Loans are similar for company as regard to fact that both are outside liabilities for a company. But there are some differences. Major which I can recall are as under:

1. Debentures can be raised by companies only while loans can be raised by anyone including individuals.
2. Loans are normally repaid in instalments either monthly, quarterly, half yearly or yearly while debentures are usually repaid in lump sum after a longer period of time which is normally at least 3 years.
3. Debentures have face value and they can be traded in market also while loans do not have any face value and they can not be traded in market.
4. Debentutes have much more features like convertibility, redeemability, management participation etc which is simply lacking in case of most loan agreements.
5. Loans are primarily secured by the asset created by using loan amount. In addition to this they are collaterally secured by some additional asset also and further even by personal guarantees. No such security is attached with debentures except their general lien over the companies assets and their right to liquidate if company fails to redeem debentures on time.
6. Upon liquidation unpaid loans have prior charge on company's assets over unpaid debentures.

All the differences above cannot be generalized in every situation. There are many hybrid products which have characteristics of both loans and debentures. It actually depends upon the nature of contract between both parties.

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