Why choosing Bonds ?

Highlights:

• When a company needs to raise capital, it can do so by issuing shares or bonds.

• Bond financing does not involve giving up control of the company and is often less expensive than equity financing.

• A company can obtain debt financing in the form of a loan from a bank. Alternatively, a company can issue bonds to investors.

• Debt securities have several advantages over bank loans and can be structured for a variety of terms.

Bonds over Bank 

For most people, borrowing money from a bank is the first choice when it comes to financial emergencies. However, the question is why a corporation would want to issue bonds instead of a bank loan?

Unlike individuals, corporations can borrow money from banks. But, issuing bonds is a more attractive option as the interest rate that bondholders receive is typically lower than what they would get from banks.

Since companies are mainly focused on generating profits, minimizing the interest they pay on their bonds is important. This is one of the main reasons why many healthy companies issue bonds. Large corporations can borrow money at low interest rates to invest in projects and grow their operations.

With bonds, companies can operate their operations more freely as they see fit, which is very important since many banks have restrictions that prevent them from doing so. For instance, they often prevent companies from issuing more debt or acquiring other businesses until their loans are fully paid.

Such restrictions can prevent a company from operating properly and limiting its options. By issuing bonds, a company can raise money without these restrictions.

Bonds over Stocks 

In exchange for money, a company can issue shares of stock, which gives investors a proportional ownership of the firm. This type of fundraising is attractive for corporations as it does not require repayment. However, there are some drawbacks to this type of deal.

Even though companies have to find investors to fund their operations, they can still issue new bonds. These bonds do not affect the company’s ownership or how it operates. On the other hand, issuing stocks allows companies to increase their stock count.

Since more shares are issued, the company’s earnings per share will decrease, which means less money in the pockets of owners. Another important metric that investors consider when assessing a company’s health is its earnings per share. A declining number is typically viewed negatively.

Increasing the number of shares issued also means that the ownership of the company will be distributed among a larger number of investors, which dilutes the value of each individual shareholder’s shares. This is not desirable since investors are usually motivated by the desire to make money from stocks. By issuing bonds, businesses can avoid this issue.