The convertible debenture has long been a long-term financing tool for businesses that already have regular sources of revenue. In recent years, small businesses have often turned to this type of financing in order to increase their capital quickly and grow rapidly. But what exactly is it?<\/p>\n
The debenture is a debt security. It is formed by a bilateral contract between an investor and a business. What distinguishes it from a conventional bond is that it is not guaranteed by any form of security. That is, there are no assets of the company to guarantee the repayment of the debt it owes to the investor. Instead, debentures are secured by the business’s creditworthiness and reputation, which makes them riskier than other bonds in the eyes of the investor.<\/p>\n
Besides the amount of the loan, the interest rate and the maturity date, the contract may also provide that the debenture is convertible or non-convertible. A debenture that is convertible is summarized in that the holders have the option to receive the interest payment or, after a certain period of time, to convert the loan into equity shares. This last option is what makes the convertible debenture more interesting for the investor since he can take advantage of the equity profits that are generated. It is therefore a tool that allows the investor to benefit from the advantages of debt as much as those of equity.<\/p>\n
Simple, economical and accessible, convertible debentures are popular with businesses.\u00a0 It provides quick access to financing by attracting its own class of investors. It is also an excellent tool to raise funds without diluting the shareholder base, as long as the debentures are not converted.<\/p>\n
However, engaging in the issuance of convertible debentures involves risks. A company that is unable to pay off or refinance its debentures may be forced to repay investors by converting the debentures it has issued. This may dilute the shareholder base and, in turn, cause the company to lose ownership to its beneficial owners, the outside investors.<\/p>\n