Why Do Companies Issue Bonds?

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Corporations often have opportunities to expand or improve their operations but need outside funding to do so. There are several ways a company can raise additional capital to fuel growth, including selling stock, borrowing from a bank and issuing bonds. Corporate financing through the sale of bonds has a number of advantages that make this the best option in many situations.

The Benefits of Bonds

Selling stock to raise capital dilutes the ownership and voting influence of existing shareholders. Borrowing money by issuing bonds avoids this problem. Issuing bonds provides another benefit for shareholders, too. When the capital provided by bonds is put to work, all the resulting earnings, less interest paid on the bonds, go to the shareholders. Borrowing money from a bank would have the same effect, but bonds have some advantages over bank financing. First, it can be time consuming and expensive to take out a bank loan. In addition, banks write restrictions called covenants into loan contracts. When a company issues bonds, the company writes the rules. As a result, issuing bonds gives an enterprise more flexibility and freedom of action.