Advantages of Issuing Bonds Compared to Common Stocks
Primarily, there are two options for companies looking to raise funds. One is issuance of bonds and the other is of issuing stocks. These two sources of raising funds are quite different. Though stocks prove to be better under certain circumstances, the advantages of issuing bonds can’t be overlooked.
One major difference between issuing of stocks and bonds is that the latter are debt securities while the former mean selling part of equity. On issuing stocks, the company sells part of its ownership of the company as shareholders get voting rights that could affect it business. One of the significant advantages of issuing bonds is that the company doesn’t part with its equity and continues to hold total control over its business affairs. So, it amounts to the company utilizing funds of others to meet its financial requirements without losing its hold on the company.
On issuing stocks, the company may distribute dividends by using cash on which it has paid taxes already. On the other hand, the interest the company is obliged to pay to bondholder can be deducted from its taxable income. So, from the point of view of taxes, bonds generally work out cheaper.
On offering stock, the company entitles the buyers to own a part, howsoever small, of the company till they keep holding on their stock. There is no restriction of time for which the buyer of stock can hold on to it and it is not unusual for many stockholders not to put their stock for sale in their lifetime and further transfer the ownership of stocks to some other person after their death, making use of their wills. Nevertheless, stock holders have the option of selling their stocks anytime they deem fit, meaning that the ratio of ownerships of the company keeps floating and it becomes difficult to keep a track of that. Moreover, despite his right to transfer his share of stock to another person, it’s necessary for the stock holder to inform the company of his decision. That makes it easy for the company to handle payments.
Among the advantages of issuing bonds is that the company is not obliged to share its profits with bondholders. It just needs to pay promised rate of interest and the principal amount on maturity of the bond. It implies that those holding stocks of the company get bigger share of money that the company produces by utilizing funds.
When a company issues bonds, those possessing bonds turn into its creditors. In case the company files for bankruptcy, it needs to pay its creditors before paying its shareholders. For investors, it is one of the significant advantages of investing in bonds as thee are not as risky as stocks.