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Why Companies Prefer Bonds Over Bank Loans
Every business needs additional funds from time to time. There are various ways of generating funds for a business, like issuing IPOs, taking a bank loan, or issuing bonds for investors. Out of these, issuing bonds is a much-used option by a company.
As per SEBI’s circular released in November 2018, large businesses must raise at least 25% of their incremental borrowing by the means of debt securities. This way, the dependency of a business on banks is reduced. When a company issues a bond, it promises to pay a certain amount of interest to the bondholder during the tenure of the bond and return the capital invested by the bondholder upon the bond’s maturity. In exchange, it uses the funds generated from the bonds for its business activities.
Let us see why companies prefer bonds over bank loans for their monetary requirements.
Bonds Vs. Bank Loans
Lower interest rates
The interest rate paid by bond issuing companies to bondholders is comparatively lesser than the interest rate on bank loans. Since the amount involved is of high magnitude, even a slight difference in the interest rates can impact the cost of raising these funds significantly for the business. Getting funds at lower interest rates helps companies invest in business expansion activities and grow.
Freedom of usage
Banks often put restrictions on the usage of the loan amount for the business. They may restrict the business from issuing further debt or even from making corporate acquisitions till the business repays the loan amount in full. On the other hand, when a company raises funds through bonds, there is no such restriction on the usage of these funds. The company can utilise this money in other projects or different growth-oriented activities for the business.
Fixed interest rates
The interest rate that the company gives to its bondholders is usually fixed at the beginning of the bond’s tenure. This interest rate does not change during the life of the bond, except for floating interest rate bonds. This helps the business to understand the cost of borrowing funds at the start of the bond’s term itself. The case is not the same for bank loans, where the interest rates may be revised as frequently as six months, leading to uncertainty and increased costs of the loan.
Long-term financing
Banks do not prefer long-term loans due to the risks associated with them. Bonds are less burdensome along with being cheaper for companies looking to generate long-term financing for lower interest rates.
Corporate bonds are one of the popular ways used by companies to generate funds. In India, corporate bonds are popularly used by companies as a means of raising a loan from investors.
If you want to know about different types of corporate bonds in India and corporate bonds interest rates, you can use some of the leading online bonds platforms. Your search about where to buy corporate bonds ends with BondsIndia, one of the most trusted online platforms to buy the best-researched bonds conveniently and safely.