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Borrowing or Issuing Bonds

You are having a debate with your co-worker about potential financing needs and your co-worker feels that borrowing from the bank is a much better way to go versus issuing bonds. Discuss whether you agree or disagree with this and why?

Solution Preview

There are positives and negatives for both types of borrowing. Let's review some of the factors which exist:

Bank borrowing:

* depends upon the amount needed - many banks have a limit on the amount of funds needed versus what they will make available
* credit scoring will have a major impact upon the rate of interest charged - can vary from 6-7% to more than 12-15%
* terms can be restrictive - may need collateral for the loan - perhaps a claim against inventory or against assets
* may want to have periodic reviews of operations to insure that payment is received and that the firm is sustainable
* will have the advantage of a local presence for managing the debt (which can lead to a profitable long term relationship)
* can receive funding in a shorter period of time than issuing bonds
* will not incur costs associated with a bond ...

Solution Summary

This case deals with the pros and cons of borrowing both short term and long term, and the effects on the business. It further analyzes the risk components of both types of borrowing and the required rate of return.