Question

How does an organization decide when to finance with a note payable versus a bond payable? Is one form of financing preferred over the other? Explain your answer.

Answer 1

As we know that note payable and bond payable both are the source of finance for an organization but both source of finance serve for different motives. Note payable is used by an firm & company for short-term financing because normally suppliers grant short-term credit to the firm & company. On other hand bond is the source of long-term financing and bonds are issued by the firms & companies for raising funds at a pre-determined interest rate for long period of time. Hence it is clear that both note payable and bond payable have different objectives that is why note payable and bond payable are used by the firms & companies for different motives.

So, it is true that one form of financing is preferred over other in different conditions. Suppose a firm & company want to meet its’ short-term financing needs then it will prefer note payable in compare to bonds because in case of note payable there will no costs of issuying financing securities, there will be no legal costs like bonds, there will be no fixed burden of interest payment like bonds. Thus firm & company will prefer note payable in case of short-term financing.

But in case of meeting long-term financial needs, a firm & company will prefer bonds payable because suppliers can not give financial support for 5 years, 10 years, 20 years etc. under note payable that is why bond payable is preferred in compare to note payable. Apart from this bond payable is repayble at a fixed predetermined date that is why firm & company can easily use raised funds for long-term and can arrange funds for repayment, thus it is quite clear that for long-term project a firm & company will arrange funds with the help of bond payable.