The Compendium

Typically, a debenture is used by a bank, factoring company or invoice discounter to take security for their loans.

It is, effectively, a type of mortgage deed.

[See ‘Floating Charge’, ‘Fixed Charge’ and ‘Secured Lending’.]

Debt Factoring

Debt factoring involves a business selling their invoices to a third party at a discounted price in order to bypass the hefty waiting times which are associated with invoice payments.

The factoring company will then chase the debts as if they were their own. The company using the service will receive payment up front for their invoices, less a percentage of the amount owed. In this way the inconvenient chasing of debtors and non-payment of invoices can be avoided.

Debt Management Plan

A Debt Management Plan (DMP) is an agreement between a debtor and their creditors to pay all of their debts, usually over a significant period of time. DMPs can only be used to pay ‘unsecured’ debts; for example debts that have not been guaranteed against their property (such as a mortgage, or secured loan).

DMPs are usually used when either:

• the debtor can only afford to pay creditors a small amount each month;
• the debtor has debt problems, but will be able to make repayments in a few
months.

A DMP can be directly arranged with creditors, or through a licenced debt management company for a fee. This company must be authorised by the Financial Conduct Authority. If the debtor chooses the latter they will arrange with the management company to:

• make regular payments to the creditor company/ies;
• share the money out between the debtor’s creditors (taking a management fee as they do).