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What is better for the business to borrow money from bank or use bonds payable ?

When planning its capital financing model, a business owner has numerous options for sourcing capital. These options include equity funds, shareholders’ debt, bonds, and bank loans. This post will discuss the differences between bonds and loans, and which is better for a business between both finance models.

What are bank loans?

Loans are money borrowed which an individual or business incur for several reasons. The amount of money a bank will a business depends on the viability of the business, collateral offered, and guarantor. Loans are set for repayment for a specific period and certain commission are added to the loan. Moreover, loans are paid in installments, when these installments are similar, they are known as an annuity.

What is a bond?

Bond is specified-income security and a core asset related to stocks and cash. Governments and companies trade bonds publicly, although some use Over a counter model. Bonds could be offered to the public or the business could tilt towards private placement.

Difference between a bond and a loan

Here are some key differences between a bond and loans:

Mode of trading

Bonds are highly tradable. When a business purchase a bond, it is usually done in a market. What this also implies is that you could sell your bond before the expiration. However, loans can’t be traded and banks mandate that the terms specified while the loan is agreed to be fulfilled.

Mode of application

Loans are easier to arrange and less complicated to arrange than bonds. This is because, with bonds, there are several processes a business has to pass through before it can be completed, however, loans are easier once all terms are fulfilled.

Affordability

Loans are usually less expensive to arrange and a good way to grow capital (short-term) especially if the business is expanding quickly. However, you can arrange bonds as quickly as loans, and it is more expensive especially for new firms.

Interest rates

The rate on interest for bonds is usually smaller especially if they are government bonds. However, the loan interest is usually high, especially for big businesses.

Repayment

Bonds are usually repaid at the end of a specific time (10,20,30 years). However, this doesn’t apply to loans, as banks expect both principal and interest on or before the expiration date.

Sense of ownership

With bonds, there is some sense of ownership as the buyer feels he is a part of the company and wants it to do well. However, no one is happy owing banks, and a lender always strive to be free of loans.

Why businesses should use bonds than obtain bank loans?

Here are some reasons why businesses should use bonds than get bank loans:

Better financing model for the long-term

Business owners looking for long-term capital (6+years) with fewer complications should go for bonds. This will mitigate any risk and regulatory constraints they may face. Bonds offer a better-fixed income market which is better than loans.

Financial freedom

Businesses have better freedom with bonds payable because it doesn’t restrict them from engaging in other business ventures. Unlike loans, which have several impediments attached by banks after borrowing.

Credit rating

Businesses get rated by several credits regulating agencies when they offer bonds especially high-risk bonds, however, this doesn’t apply to loans.

While both bonds and loans offer a reliable financing plan, business owners should offer bonds payable than obtaining loans for banks.