How bond finance works
How debt capital markets can give you access to public funding from a variety of investors.
There are a variety of reasons why your business might look at securing bond finance. It may be to fund the purchase of large assets - such as new buildings or equipment. Alternatively, it could be to secure a longer-term funding structure within your business - giving access to long-term working capital or funding for greater investment in the business.
Like a loan, a bond is a formal contract to repay borrowed money with interest at fixed intervals. On top of the regular interest payments, there will also be a specified date when the debt will mature and the full amount of the bond will be paid back to the investor.
Both the bond and stock markets work on a similar structure - where sellers (businesses) and interested buyers (investors) are placed together to meet their respective financing and investment needs. Banks also play a significant role as market makers. Banks underwrite - ie accept liability for - stocks and bonds issued by businesses to help bring them to market.
If you issue a bond, you are not selling ownership of your business. Though like shares, once bought, bonds can be traded by investors on the public market. However, this is not true for private placements - where the intention of the investor is usually to hold the private placement until maturity.
When someone buys your business' bonds they become one of your business' creditors. This means that, in the event of liquidation, they will have a claim on the company that ranks level with other creditors - unless the bond was issued with security on specified assets.
Types of bond finance
There are a number of ways you can access funding through bond markets - also known as debt capital markets. These include:
- corporate bonds - see advantages and disadvantages of raising finance by issuing corporate bonds
- private placements - see advantages and disadvantages of raising finance through private placements
- securitisation - see advantages and disadvantages of raising finance through asset securitisation
Who invests in bonds?
Bonds play an important role in investors' portfolios - by offering them an opportunity to diversify their investments and expand into new markets.
Institutional investors - eg pension funds, banks and insurance companies - invest in a wide range of assets, which includes significant investment in corporate bonds. Institutions may invest directly in corporate bonds or through funds - which allow them to diversify their investment over a range of businesses.
Investment and finance companies - often representing groups of private individuals - also invest in capital markets.