Almost every company reaches a stage in their lives when they want to expand or grow. Whether it’s a new project that you are dreaming of or you want to evolve your offices to additional areas, there tends to only be one thing in the way when it comes to making these dreams reality. Money. You may have a successful business with a steady turnover but as your business aspirations grow, sometimes financing them can become a difficult factor.
Corporate bonds are a method adopted by some companies as a means of raising capital. Investors buy corporate bonds providing the company with a loan for their disposal. At the end of the agreed loan period, the investor will receive their initial investment amount back as well as a pre-agreed rate of interest. You could think of it as a type of ‘IOU’ offered from a company to an investor. The minimum amount for corporate bonds used to be tens of thousands of pounds which mean that they were often reserved for the highest level of investments however nowadays this tends to be significantly less making them an increasingly appealing option for many businesses.
Corporate bonds have a nominal value which denotes the price which they are first sold onto the market for. The loan period is agreed at the time as is a rate of interest which will typically be fixed for the timeframe. The redemption date of the corporate bond denotes the agreed date for repayment to the investor.
Disadvantages of corporate bonds
Corporate bonds may seem like a particularly attractive option to a company looking to expand themselves further. However as with all bonds options, there is a certain amount of risk involved. Any company considering issuing corporate bonds should ensure full awareness of the potential drawbacks and the implications that they could have on the business.
- Although the nominal value will not need to be paid back until the redemption date, the interest is typically repaid on a regular basis, usually either monthly, quarterly or annually. Even if the company makes a loss, you will still be expected to meet these repayments.
- In some instances, bondholders possess the right to implement certain restrictions to the corporation regarding their operations or performances in order to reduce their risks.
- The process itself of selling the corporate bonds may not be simple. There are a number of listing rules which companies may need to comply with in order to trade bonds. This includes a requirement to disclose information about your company publically, not just at the listing stage but potentially throughout the whole life cycle of the bond.
- The involvement of the investor may be significantly different to that of a bank lender. The correspondence and relationship may not be as prominent as it would be with a financial establishment which could make any arising issues more difficult to resolve.
Advantages of corporate bonds:
Although the risks and drawbacks are there, the number of advantages can often appeal to a company looking to raise their capital.
- Corporate bonds are flexible. The interest can often be paid back either monthly, quarterly, or annually and the nominal value will not need to be repaid until the specified date. This offers some companies a method to effectively suit their business structure.
- As the interest rate is typically fixed, this gives loans a certain degree of protection which variable rates may not offer and also avoidance of issues incurred by rising inflation or fluctuations in the economic climate.
- Bonds are separate from shares which means that issuing bonds will not affect or dilute existing shareholdings.
- The control factor is usually one of the most appealing factors for a company. Issuing bonds will not typically affect the management or operational principles of the company as it will not change the ownership structure. This tends to mean that companies have the ability to spend the capital as they desire.
As with all business decisions, it is important to ensure that you have weighed up the pros and cons and fully understand the effect that corporate bonds could have on your business. Corporate bonds should not be seen as a desperate method of getting yourself out of financial difficulty as you will be required to pay back the full amount with the addition of interest. Ensure that you do your research, seek guidance, and make only well-informed decisions when considering if corporate bonds are the best option for your business.