Corporate and Business Law (Global) · Loan capital

Share Capital vs Loan Capital (Debentures) for ACCA Corporate and Business Law

Updated 11 October 2026 · Fact-checked

Share capital is money a company raises by selling ownership stakes. Loan capital is money it borrows. A debenture is a document that acknowledges a company's debt, often with a charge over assets. Shareholders own the company and get dividends if declared. Debenture holders are creditors who get interest and repayment.

Understand Share Capital vs Loan Capital (Debentures)

A company needs money to start and grow. It can get that money in two main ways: by issuing shares or by borrowing. The first is equity finance. The second is debt finance, also called loan capital.

When you buy shares, you become a member (shareholder) and part-owner of the company. You have no right to be repaid. Your return is a dividend, paid only if the company decides to declare one and has enough distributable profits. You usually get voting rights, so you share in control. In a liquidation, shareholders are paid last, after all creditors. That is why equity is the riskier investment, with the chance of higher gains if the company does well.

When you lend to a company, you become a creditor, not a member. You have no vote at general meetings (unless the terms say otherwise, which is rare). The company must pay interest at the agreed rate, whether or not it makes a profit, and must repay the loan on the agreed date. If it fails to pay, you can sue as a creditor. Lenders rank ahead of shareholders if the company is wound up.

A debenture is a document issued by a company that acknowledges a debt. It usually sets out the amount, the interest rate and the repayment terms. A debenture may be secured by a charge over company assets, or unsecured. Debentures may be issued singly to one lender, such as a bank, or as a series to many investors, often under a trust deed. In the exam, think of a debenture as the company's written promise to repay a loan, not as a share of ownership.

A company can choose a mix of the two. Too much debt means fixed payments and a risk of insolvency. Too much equity means diluting existing owners' control and profit share. Questions often ask you to compare the two or to classify a person as a member or a creditor.

Key formulas to remember

Shareholder status: Shareholder = member = owner; return = dividend (if declared); repayment not guaranteed; Shareholders usually vote, and rank last in a liquidation.
Debenture holder status: Debenture holder = creditor; return = interest + repayment of capital; Interest is due whether or not the company makes a profit.
Debenture definition: Debenture = document acknowledging a company's debt (secured or unsecured); It may be a single loan document or one of a series of stock issued to many lenders.
Order of risk on liquidation: Secured creditors, then unsecured creditors, then shareholders; A simplified order. The detailed order is a separate topic.

How to solve Share Capital vs Loan Capital (Debentures) questions

Use this method for any question that asks you to compare, classify or advise on shares and loans.

1Read the question and identify whether the person provided money as an owner (shares) or as a lender (loan or debenture).
2State the person's status: member or creditor.
3Test the return: dividend that depends on profits and a decision, or interest that is a fixed contractual obligation.
4Test control: does the person vote at general meetings? Shareholders usually do; debenture holders usually do not.
5Test repayment and risk: is there a right to be repaid on a date, and where does the person rank in a liquidation?
6Check whether security applies. If there is a charge over assets, note that the debenture is secured and the holder ranks better.
7Give your conclusion in one clear sentence, then add the reason.

Quickest way: Owner or lender in five seconds

When to use it: Use it for Section A questions, where you must choose between statements quickly.

Ask: owner or lender? Owner means share. Lender means debenture or loan.
Link owner to dividend, vote and last place on liquidation.
Link lender to interest, no vote and priority over shareholders.
Eliminate any option that gives a shareholder a right to be repaid, or gives a debenture holder ownership.
Pick the option that matches the status you found.

Common mistakes in Share Capital vs Loan Capital (Debentures)

Saying a debenture holder is a member of the company.
Both groups put money into the company, so students blur them.
Fix: Debenture holders are creditors. Only shareholders are members.
Saying shareholders are always entitled to a dividend.
Students confuse dividends with interest.
Fix: A dividend needs a declaration and distributable profits. Interest on a debenture is a debt that must be paid.
Saying debentures must always be secured.
Debentures are often linked with charges, so the two ideas are merged.
Fix: A debenture may be secured or unsecured. Security is an extra feature, not part of the basic meaning.
Saying debenture holders can vote at general meetings as of right.
Students assume that anyone with money in the company gets a say.
Fix: Voting normally comes with shares. Lenders usually rely on contract terms and any security instead.
Stating that shareholders rank before creditors if the company fails.
Ownership sounds more important than lending.
Fix: Shareholders are paid last. Creditors must be paid first.

Worked examples

Example 1

Anna buys 1,000 ordinary shares in Zeta Co. Ben lends Zeta Co $50,000 and receives a debenture with 8% annual interest. Explain the difference in the legal position of Anna and Ben.

Show the solution

Anna paid for shares, so she is an owner and a member of Zeta Co.
Ben lent money, so he is a creditor, not a member.
Anna's return is a dividend. It depends on profits and the company's decision to declare it.
Ben's return is interest of 8% × $50,000 = $4,000 per year. It is due whether or not Zeta makes a profit.
Anna usually has voting rights at general meetings. Ben usually does not.
If Zeta is wound up, Ben ranks as a creditor and is paid before Anna, who ranks last.

Answer: Anna is a member with dividend and voting rights but ranks last. Ben is a creditor entitled to $4,000 interest a year and repayment, and ranks ahead of Anna.

Example 2

Which ONE of the following statements about debentures is correct? A. A debenture holder becomes a member of the company. B. A debenture is a document acknowledging a company's debt. C. A debenture must always be secured by a fixed charge. D. Interest on a debenture is payable only if the company makes a profit.

Show the solution

Test A: lenders are creditors, not members. A is wrong.
Test B: this is the basic definition of a debenture. B is right.
Test C: debentures may be unsecured, and a charge may be floating rather than fixed. C is wrong.
Test D: interest is a debt payable whether or not there is a profit. D is wrong.

Answer: B

Exam tips

In Section A, decide first whether the person is an owner or a lender. Most wrong options swap the rights of the two.
Watch for absolute words such as always, must and only. Debentures need not be secured, and dividends are not guaranteed.
In Section B scenarios, underline the words shares, loan, interest and dividend. They show the status of each person.
Remember that each objective question is marked all or nothing, so read all four options before choosing.
Link this topic to charges. If a question mentions security over assets, it is moving to debenture and charge rules.

Practice questions from Loan capital

Share Capital vs Loan Capital (Debentures) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Share Capital vs Loan Capital (Debentures): frequently asked questions

What is the main difference between share capital and loan capital?

Share capital is raised from owners (members) who share in profits and control but are paid last. Loan capital is borrowed from creditors who receive interest and repayment and rank ahead of shareholders.

What is a debenture in ACCA Corporate and Business Law?

A debenture is a document issued by a company that acknowledges a debt. It may be secured by a charge over company assets or unsecured. The holder is a creditor.

Are debentures the same as shares?

No. Shares give ownership, usually with voting rights and dividends. Debentures create a debt, with interest and repayment due regardless of profit.

Which is riskier for the investor, shares or debentures?

Shares are generally riskier. Shareholders have no right to repayment and are paid last on liquidation. Debenture holders have contractual rights and, if secured, better protection.