Question

What are some advantages of issuing bonds versus borrowing money from a bank? What are some disadvantages of issuing bonds versus borrowing money from a bank? Why do you think a business chooses to do one versus the other?

Answer 1

Advantages of issuing bonds versus borrowing money from a bank:-

1. Bank loan has specified end-use and bond does not have.

2. Interest loan paid by the company on bond is lower than the bank loan.

3. Restrictions are not there in bond as compared to the bank loan.

4. Bonds can be sold to banks, financial institutions, high net worth income individuals as compared to bank loan which can be taken only from banks.

Disadvantages of issuing bonds:-

1. Obligation to pay the investor interest regardless of financial condition.

2. Comply with various regulations rules if bond become tradable on exchange.

3. Changing terms of contract is difficult to modify.

Business should choose taking bank loan as compared to bonds because:-

1. Taking a bank loan is much easier as compared to issuing bonds.

2. No compliance of strict regulations once the amount is borrowed from loan as compared to bonds.

3. Banks sometimes waive off the loan repayment once the financial position of the company is not sound.

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