Question

When it is time for your small business to raise large sums of cash without borrowing from a lender, you have two choices. You can sell stocks or bonds. Selling stocks means allowing investors to buy shares of your company, which means they actually own a piece of it. Selling bonds means borrowing money from investors and paying interest to them. Each method works, but there are different consequences for how you run and grow your company.

Submit your decision to issue stock or to issue bonds to raise capital for your business. Also give at least two reasons for your decision.

Answer 1

I have a medium-sized textile business having branches in renowned cities throughout the country.

I prefer to have issuing bonds for raising capital.

Reasons are as below:

No.1) Ownership: Issuing shares require selling of ownership in the market. Stockholders become owners of my business, which I don’t want right now. I have to expand business in near future by opening more branches and by entering into foreign market; in the process of doing so I need to exercise my own thinking and decision. If ownership is offered I may not have such power, since the stockholders may interfere in my work. Therefore, it is better to have issuing bonds and discharging responsibility by repaying at maturity with interests; because, bondholders are the lenders but not owners.

No.2) Easiness: Acquiring finance through bond would be easier than stock, since the return is guaranteed in case of bond but not stock. There is periodic interest for bond and at maturity there is the repayment of par value; therefore, these are assured income for bondholders and they may invest in the company delightedly. Stocks don’t have such assurance, since their income from the company is only dividends and it depends on me or my management team whether to be paid or not to be paid.