Companies have many different ways of raising money when they need it. Common among these are the issuance of stock to the public or going to a bank for a loan.
Yet another way that companies utilize in the effort to generate short-term funds is by selling bonds to investors. These bonds are essentially a loan by investors to the company. In return for the influx of capital, investors are paid back periodically by the company in question. Interest payments are also offered to investors as a way to compensate them for the risk that the company might not be able to repay. Investors can get a yield from these bonds that are often significantly higher than government bonds.
On the other side of the coin, the company in question issuing the bonds gets their share of benefits that might be denied to them if they were to use other methods of raising money. A company can only issue so much stock before the price gets diluted and affects their financial reputation. Banks also can impose stringent interest rates and can apply much more pressure than investors if the repayments are not quite in time. So, the corporate bond is an example of quid pro quo which can benefit both sides of the transaction.
Knowing all the different types of bonds is a good idea if you, as an investor, wish to put your money into them. Coming at it from the company’s point of view there are many ways for them to use the cash to benefit the company.
A company that wishes to push their operation into a bigger area, or perhaps even create a second location for the business, can use a bond for just that reason. If the expansion goes as planned, it shouldn’t be difficult for them to repay the money owed the bondholders. In addition, the long-term effect such an expansion can have on a company will serve a positive financial purpose for many years after.
A company’s strength lies in the employees that they hire. And there are times throughout a company’s history when it may need to significantly increase their workforce, improve it, or both. That’s where the money that comes from issuing bonds can make a difference. Being able to offer the best candidates competitive wages is often enough to hire them away from others in the market.
Every once in a while, a company known for selling a certain type of product may decide they want to branch out. That can be an extremely costly endeavor, requiring significant funds in research and development to make the new product happen. A surge in funds with bonds as the source will provide the kind of capital to possibly make a new product launch a reality.
There may be other occasions when the kind of funding that only selling bonds can produce is needed. If you own a business, it certainly might be something you’ll have to consider at one time or another.