At some point, every company needs money to grow. Some take loans from banks, while others sell shares to investors. But there’s another way—issuing bonds.
A bond is a simple agreement: a company borrows money from investors and promises to pay it back with interest. In exchange, investors receive fixed payments over time, and when the bond matures, they get their full investment back. It’s like a loan, but instead of borrowing from a bank, the company borrows directly from the public.
Why would a company choose this over a bank loan? Why not just sell shares? The reasons vary, but bonds offer flexibility, lower costs, and allow businesses to raise money without giving up control. Understanding why companies issue bonds helps explain why this method is so popular—especially for businesses that need long-term funding without interference from outside investors.
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Key Takeaways
- Companies issue bonds to raise money without giving up ownership. Unlike selling shares, bonds allow businesses to borrow funds while maintaining control.
- Bonds work like loans but come from investors, not banks. Investors lend money to companies in exchange for fixed interest payments and repayment of the principal at maturity.
- Businesses prefer bonds over bank loans when they want better terms. Bonds often come with lower interest rates, longer repayment periods, and fewer restrictions.
- Many companies use bonds to refinance expensive debt. Issuing new bonds at a lower interest rate can help companies save money and manage their financial obligations better.
- Bonds are ideal for funding long-term projects. Businesses use them to finance expansion, infrastructure, and research without worrying about short-term repayment pressure.
What Are Bonds?
A bond is simply a loan from investors to a company. When a business issues bonds, it is borrowing money from individuals or institutions, promising to pay back the amount with interest after a set period. Unlike shares, where investors own part of the business, bondholders don’t get ownership—they are lenders, not partners.
Companies issue bonds instead of taking bank loans because they can get better terms—sometimes lower interest rates, longer repayment periods, or more flexibility in how they use the money.
Related: Benefits of Holding Stocks for a Long Term
Why Do Companies Issue Bonds?
Raising Capital for Expansion
I’ve seen businesses with great ideas struggle because they couldn’t raise enough money to grow. Expansion costs money—whether it’s opening new locations, upgrading equipment, or increasing production. Instead of taking out a high-interest bank loan, many companies issue bonds to raise the capital they need.
For example, let’s say a company needs ₦5 billion to build a new factory. Instead of going to a bank, which might charge 15% interest and demand collateral, the company can issue bonds to the public, offering 10% interest. This way, they get the money they need at a lower cost, and investors get a steady return on their investment.
Avoiding High-Interest Bank Loans
Bank loans can be expensive. Anyone who has tried to get a business loan knows how strict banks can be. High interest rates, collateral requirements, and short repayment terms make loans risky for businesses. Bonds, on the other hand, give companies more control over how they borrow money.
If a company is confident in its ability to make money in the future, issuing bonds allows them to set their own terms instead of being at the mercy of banks.
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Keeping Ownership Intact
One of the biggest advantages of bonds is that companies can raise money without giving up ownership. If a business sells shares, it means bringing in new shareholders who can influence decisions. Many business owners don’t want that—they prefer to remain in control.
A good example is a family business that wants to expand. If they sell shares, new investors might come in and demand changes. By issuing bonds instead, they can raise money while keeping full control of their company.
Refinancing Existing Debt
Sometimes, companies already have loans but want to reduce the cost of repayment. They issue bonds to pay off old debt at lower interest rates.
For instance, if a company took a bank loan at 18% interest a few years ago but now interest rates have dropped to 12%, they can issue bonds at 12% and use the money to pay off the expensive loan. This saves them a lot of money in the long run.
Funding Long-Term Projects
Some projects require huge investments and several years to complete—such as building power plants, roads, or new technology. For these types of projects, bank loans are too short-term and too expensive.
Bonds provide a better solution because companies can set long repayment periods—sometimes 10, 15, or even 30 years. This allows them to focus on completing the project without worrying about immediate repayment.
How Companies Issue Bonds
Deciding the Bond Terms
Before issuing bonds, a company must decide:
- How much money they need.
- The interest rate they will pay investors.
- The repayment period (e.g., 5 years, 10 years, 20 years).
These terms must be attractive to investors while also being affordable for the company.
Getting Regulatory Approval
Companies must follow financial regulations before issuing bonds. They usually work with government agencies or financial institutions to ensure everything is legal and transparent.
Selling the Bonds to Investors
Once everything is set, the company sells bonds to the public. Investors—both individuals and large institutions—buy the bonds in exchange for regular interest payments.
Paying Interest and Returning the Money
Bondholders receive fixed interest payments (coupon payments), usually every six months or annually. When the bond matures, the company pays back the full amount borrowed.
Types of Bonds Companies Issue
Corporate Bonds
Issued by businesses to raise money. They offer higher returns than government bonds but come with more risk.
Government-Backed Bonds
Some businesses issue bonds that are partially backed by the government, making them safer but with lower returns.
Convertible Bonds
These bonds give investors the option to convert their bonds into shares if the company grows. Investors like this because it allows them to benefit from the company’s success.
Fixed vs. Floating Rate Bonds
- Fixed-rate bonds have constant interest payments.
- Floating-rate bonds have variable interest payments based on market conditions.
Risks Companies Face When Issuing Bonds
High Interest Payments
Companies must pay interest regularly, whether or not they are making a profit. If they take on too much debt, it can become a financial burden.
Market Conditions May Change
If interest rates rise, new investors will demand higher returns, making older bonds less attractive. This can reduce demand for new bonds.
Economic Downturns
During economic slowdowns, businesses may struggle to generate enough revenue to pay back bondholders. This can lead to financial trouble.
Default Risk
If a company fails to repay bonds, it loses investor confidence and might struggle to raise money in the future.
Should Small Businesses Issue Bonds?
Bonds are usually issued by large companies because they require a strong financial reputation to attract investors. Small businesses often struggle to convince investors to buy their bonds unless they have a solid track record.
Alternative Funding Options for Small Businesses
- Bank loans – Suitable for smaller funding needs.
- Equity funding – If they are willing to sell shares.
- Grants and Angel Investors – For startups looking for capital without debt.
Frequently Asked Questions (FAQs)
1. Why Do Companies Issue Bonds Instead of Taking Bank Loans?
Companies issue bonds because they offer more flexible terms, lower interest rates, and longer repayment periods compared to bank loans. Banks often require collateral and impose strict conditions, while bonds allow businesses to raise money directly from investors on better terms.
2. Why Do Companies Issue Bonds Instead of Selling Shares?
Selling shares means giving up ownership and decision-making control, which many business owners want to avoid. Issuing bonds lets a company raise funds while keeping full ownership of the business.
3. Why Do Companies Issue Bonds for Expansion?
Business expansion—such as opening new locations, increasing production, or acquiring assets—requires large amounts of money. Bonds provide a reliable way to secure long-term funding without the short repayment pressure of bank loans.
4. Why Do Companies Issue Bonds When Interest Rates Are Low?
When interest rates are low, companies can borrow money at cheaper rates by issuing bonds. This reduces their financing costs and allows them to invest in growth while locking in lower interest payments for years.
5. Why Do Companies Issue Bonds to Refinance Debt?
Businesses issue bonds to pay off older, high-interest loans and replace them with lower-interest debt. This helps them reduce financial burdens and improve cash flow.
6. Why Do Companies Issue Bonds for Long-Term Projects?
Long-term projects like infrastructure development, factory construction, and research & development need funding that stretches over several years. Bonds provide the perfect solution, allowing businesses to match funding with the project’s timeline.
7. Why Do Companies Issue Bonds During Economic Uncertainty?
In uncertain economic times, companies may issue bonds to secure stable funding before interest rates rise or credit markets tighten. It helps them build a financial cushion to navigate challenges.
8. Why Do Companies Issue Bonds to Institutional Investors?
Many businesses target institutional investors like pension funds, insurance companies, and mutual funds when issuing bonds because they invest large amounts and provide long-term financial stability.
9. Why Do Companies Issue Bonds Even When They Are Profitable?
Even profitable companies issue bonds to fund new opportunities, maintain liquidity, or take advantage of favourable market conditions without using their own cash reserves.
10. Why Do Companies Issue Bonds Instead of Taking Government Grants?
Government grants are limited, come with strict conditions, and may not be sufficient to meet a company’s full financial needs. Bonds give companies more control over their funding strategy and allow them to raise as much money as needed.
Conclusion
Companies issue bonds because they offer a flexible, cost-effective way to raise money without giving up ownership. Bonds are especially useful for expansion, refinancing, and long-term projects.
For investors, bonds provide a steady source of income with less risk than stocks. However, both companies and investors must understand the risks involved.
This article is for informational purposes only and should not be considered financial or investment advice. While we strive to provide accurate and up-to-date information, financial decisions should be made based on professional consultation and thorough research. Entrepreneurs.ng is not responsible for any financial losses or business risks resulting from the use of this information. Always consult a qualified financial expert before making investment or funding decisions.
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