Question

Is raising capital by issuing bonds always the best option? What are some of the disadvantages of issuing bonds ?

Answer 1

A company have numerous options for raising capital such as retain earnings, sell assets, issue shares and issue bonds. When a company is raising capital by issuing bonds, it's borrowing money from investors in exchange for interest payments and an IOU.

Advantages to issuing bonds
Let's look at certain ways issuing bonds can be best option to those other ways of raising capital.

-- Retaining earnings: Issuing bonds permits a company to capital access much faster than if it first had to earn and save profits. As the phrase says, we have to spend money to make money.

-- Selling assets: Growing companies might decide to borrow money instead of selling assets as companies are well, growing and in the process of acquiring -- not selling -- assets

--Issuing shares: Issuing bonds is much economical than issuing shares. The value of its existing shares is diluted when a company sells new shares

--Issuing bonds offers tax benefits: One other benefit borrowing money has over issuing shares or retaining earnings is that it can decrease the amount of taxes a company owes.

Disadvantages to issuing bonds

-- Financial risk: Since the bonds are a debt, the company has payment obligations that are enforceable under law. Even if the company runs into financial trouble, coupons and principal payments must still be made.

--Refinancing risk: When bonds mature the issuer still requires capital for refinancing

--Large bullet payment: The amount of principal is paid when bonds mature. In case there is a delay in the payment it may be convenient initially, thus company will have to make a huge “bullet” payment when the bonds mature.