— Kishore V, SME and ACW at Edumarz
- In addition to the primary security, the loan provider obtains collateral security.
When a company takes out a loan, it may issue debentures to the bank or financial institution as supplemental security in addition to the primary security.
- It’s vital to understand that a debenture issued in the usual course is different from a debenture issued as collateral security.
Debenture holders are entitled to interest at a predetermined coupon rate in the usual course of business, while the holder of a debenture issued as collateral security is not.
However, if the loan’s principle or interest is not paid on time, it may be able to recoup its losses by selling the debenture on the secondary market.
The primary security will be sold first, followed by the use of a debenture as collateral security.