Financing of operations through bonds
Both new and already operating enterprises choose bank loans and credits among the available forms of business financing. As you know, the terms of the lenders are often difficult to meet, and the rigid repayment of loan installments may threaten the company in a period of deteriorated financial liquidity. Especially when it comes to small and medium-sized enterprises.
There is, however, a much more advantageous alternative source of financing for entrepreneurs, namely bonds. They are all associated with bonds issued by the Treasury and huge amounts of money. However, in the securities market, even a small company or private individual can be the issuer of bonds.
Bonds in the stock market
The rules for issuing bonds are regulated in the Act of June 29, 1995 on bonds. According to Art. 4, the bond is a security issued in a series in which the issuer states that it is the debtor of the bond owner - the bondholder. At the same time, he undertakes to provide a specific benefit to him, which may be pecuniary or non-pecuniary. Issuance in series should be understood as securities representing property rights divided into a specified number of equal units.
In other words, bonds are some kind of loan (or credit) where the issuer of the security is the borrower and the bondholder is the lender. However, what distinguishes a bond from other sources of funding is in particular its form of security, where the terms are set by the issuer. Therefore, thanks to the establishment of own rules for the repayment of the liability by the entrepreneur (borrower), it is a more advantageous form of financing than, for example, loans.
Principles of operation of bonds
Due to the fact that the bond issuer has the right to dictate the terms, it may set any deadlines for the repayment of the liability and decide on the frequency of disbursement of subsequent tranches of money capital. Therefore, it allows you to adjust the source of financing to the progress of the investment. In the event that the entrepreneur needs a large injection of cash to start a given project, he can immediately obtain the entire capital or adjust the inflow of cash as the work progresses. Interestingly, if the issuer determines that further encumbrance of assets with another liability may have a negative impact on the company's financial economy, then it may stop issuing bonds, and thus - drawing subsequent tranches of capital.
It is also worth adding that the entrepreneur may adjust the capital repayment date depending on the return on investment. The sooner the return is expected, the shorter the bond's maturity may be. Due to their maturity date, bonds can be divided into:
- short-term (maturity up to 1 year),
- medium-term (maturity from 1 to 5 years),
- long-term (over 5 years).
Importantly, the bonds may be repaid in parts determined by the issuer (at maturity) or in full in accordance with the maturity date of the security. The only burden that should be paid regularly is the bondholder remuneration for the so-called a coupon, i.e. the interest rate on the face value of the bond. The interest rate also depends on the issuer.
On the other hand, the bodies authorized to issue bonds include:
- State Treasury - treasury bonds,
- municipal institutions (municipalities, cities) - municipal bonds,
- private entrepreneurs - corporate bonds.
Additionally, it is worth considering introducing your own bonds to the virtual trading platform - Catalyst. It is run by a company belonging to the Stock Exchange and allows you to make your own securities available for trading. Thanks to this, it is possible to attract more people for the bonds to be issued.
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