Loan agreement, guarantee, debenture or legal charge: what is the difference?

A finance proposal may involve a loan agreement, a guarantee and security documents. These papers do different jobs. Understanding the distinction helps you prepare better questions and avoid assuming that signing one document deals with the whole arrangement.

This guide is an introduction for business owners and investors considering arrangements in England and Wales. It is not a recommendation to borrow, lend or provide security.

Start with three separate questions

The title is only a starting point. Read the operative provisions and ask an adviser to explain how the documents work together.

A guarantee can create separate exposure

A personal guarantee can make a director or owner liable when the business does not meet its obligations. The British Business Bank's guide to personal guarantees explains the potential effect on personal finances and the importance of understanding the terms before signing.

Ask whether liability is capped, what the cap includes, whether it covers only one facility and what must happen for a release. Do not assume that leaving the company, selling shares or reaching an informal understanding with another owner releases a guarantee. Ask the lender and your adviser what formal steps are required.

Security needs its own review

A debenture used in company lending may contain security over a range of company assets. A legal charge is often used for security over a particular property. The exact assets, obligations and restrictions depend on the instrument. A reference to “secured lending” in a loan agreement does not settle every step needed to create and register effective security.

Ask which assets are included, whether another lender already has security and what consents or priority arrangements are needed. Consider the effect on ordinary operations: selling equipment, dealing with cash or taking further funding may be affected by the agreed terms.

Plan registration before signing

Companies House guidance states that details of a company charge must be delivered within 21 days beginning the day after creation; late registration requires a court order. It explains the certified-copy requirement and the consequences of missing the deadline. See registering a company charge.

The MR01 guidance stresses the need for a complete filing. Property security may involve separate land-registration work. Agree responsibility for each step with the professionals handling the security; a diary reminder is not evidence that registration has succeeded.

Prepare one finance-document schedule

List the borrower, lender, guarantors, assets, existing facilities and every proposed document. Beside each document, record its purpose, signatories, approval requirements, registration or notification steps and who will provide completion evidence.

For example, a company borrowing to acquire premises may have company repayment obligations, property security and a director's guarantee. Those exposures should be explained separately. A commercial view that the property is a good investment does not answer the director's personal-risk questions.

Choose preparation material carefully

Explore the investors and funding topic for the current range. For group lending, read the intercompany loan checklist. For a shared property project, start with ownership and funding decisions. Security drafting, priority, execution and registration should be addressed by the relevant advisers.