The Advantages & Disadvantages of Bonds Over Stock For Long-Term Financing

For businesses, deciding how to raise capital is important.

Jan 16, 2016 at 6:02AM

Businesses generally have two ways to raise the capital they need. They can borrow money, either from a financial institution or by issuing bonds on the open market. They can also issue stock in the business, giving investors an ownership interest. Each method has advantages and disadvantages that can make one form of financing more suitable than the other in certain cases.

Bonds and other debt
Borrowing money for your business can be a great way to raise capital. For smaller businesses, direct loans from banks or other funding sources are the most common method of capital-raising. As a business grows, it can get more access to capital markets, opening the possibility of issuing longer-term bonds to investors.

The primary advantage of bonds or borrowing is that the terms of the debt are set forth upfront, making the obligations of the business much clearer. The lender has no ownership interest in the business, and so if it is hugely successful, the borrower is able to keep all of the profits of the business, only repaying principal and interest to the lender.

There are a few disadvantages of borrowing to raise capital. First, you have to pay interest on time, with the consequence for failing to do so being defaulting on your debt. Depending on the interest rate, you might have difficulty paying ongoing interest and having enough leftover profit to grow your business or cover other necessary expenses. In addition, some loans impose ongoing obligations known as covenants on borrowers, and if the business breaches the covenants, it can give the lender rights against the business. For small business, lenders will often require a personal guarantee on business loans, which can potentially leave your personal assets at risk.

Stock
Issuing stock or other ownership interests in a company can also help you raise capital. The advantage of selling equity is that there's no obligation to repay the investor for the shares sold. If the business fails, the stock becomes worthless, but the company doesn't have to make the investor whole.

The downside of stock, though, is that the investor has certain legal rights that come with owning a piece of the business. Typically, stock investors have voting rights to elect members to the board of directors. They're entitled to a proportional share of any dividends the company pays. If the company is successful and receives a buyout bid, then all shareholders are entitled to receive payment from the acquiring company for their shares.

In the end, both bonds and stocks have their own risks and potential rewards. The right choice for your business depends on how much control you're willing to give up and how much risk you want to take.

The $15,978 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus. Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us at knowledgecenter@fool.com. Thanks -- and Fool on!

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers