Many companies issue bonds to raise funds to support their operations. Some companies need finance to expand their business operations while others want to diversify it. Companies also issue bonds when they are facing financial troubles to fund their present operations. Any reason can cause a new bond issue. However, selling bonds to raise money is still considered a bad move by many financial analysts. The prime reason for such an opinion is the negative effects of bond issue that are faced by few companies . Overall, there has been a has a mixed opinion among people who do not have a proper knowledge about bond market and functions. Therefore, it is essential to know about the advantages and disadvantages of issuing a bond before an organization frame their opinion.
Advantages of bond issue;
Source of cash
A company can fulfil its financial requirement by issuing of bonds. bonds can be more effective than shares as bondholders do not become the owners of the company, unlike shareholders. The company only procures their money and in return pay a certain amount of interest.
Bondholders are the people who lend their money to the company as a part of the borrowed fund. Such people do not share ownership of the company in any form as the shareholders do. Therefore, these people cannot interfere in the day-to-day operations of the company.
Easy fund generation
Companies who want to gather funds and do not want to issue stocks prefer to issue bonds. According to experts companies classify bonds as an easy alternative in comparison to raising a loan from a bank. The main reason is that interest charged by banks or any other financial institution is higher than they offer to the bondholders.
Disadvantages of bonds issue
Depends on credibility
It is not easy to issue a bond. Only a company with good credibility can issue a bond. The efficiency to raise a bond depends on the credibility of the issuing company. The rating agencies decide such credibility. Investment grade bonds can generate more money than high yield bonds.
The purpose of buying a bond is to get a fixed payment of interest. This due payment adds burden on the company to repay the bondholders. The scheduled payment of interest is an additional expense for the company. In case it fails to do so, it will be considered as a default payment. Such an event can downgrade the credit rating of the company.
Bonds are a part of the borrowed fund, and they are considered as an external debt for the company. Any external debt is a liability of the company. A company has an obligation to pay its liabilities before securing profit for itself in case there is surplus of revenue.