At the time when a business house or government is bogged with debts or need to raise money for several operations and schemes, they search out different financial option for support. At that time two debt instrument comes to rescue; long term loans and bonds. However, these two are very different from each other in terms of their requirements and conditions.
In this article, we will discuss about all the aspects of these two debt instruments
What is loan & Bond?
A loan is generally the amount which we borrow from single identity, lender or directly from banks. There are certain repayment terms which can vary from lender to lender. One has to repay principal amount plus the interest charged.
Bonds are somehow similar to loans. Here we borrow money directly from public instead getting it from banks and individual lenders. With bonds, borrowing company makes interest payment to bondholders twice a year and repays the principal amount at the end of maturity date.
Pros and cons
- Interest- Bonds are much beneficial in terms of interest. When we go for bond, they charge lower and long term interest rates.
Interest rates charged by banks and individual lender are way to higher, as a result company ends up costing much more than the actual amount.
- Flexibility– bonds don’t come up with any rule and regulation. It has a natural tendency to flow and one could operate it quite easily. For example, one could reach for another acquisition before repayment for the previous one.
Banks has certain norms and operating restriction as a result company could lose financial and physical growth.
- Modification- long term loans are often open to modification and it can be restructured for the benefit of the borrowers. There could be certain flexible refinancing options with variable interest rate or bulk repayment etc.
Whereas when a company or government opts for the bond, they certainly commit for scheduled repayment and fixed interest rates. One couldn’t get any sort of relief afterwards in this instrument.
- How to get- amidst all the pros and cons, the biggest influencing factor is that how could one avail for these debt instruments.
Bank loans are easy to get as compare to bonds. One has to fulfill all the requirement of banks to acclaim loans whereas, to sell bonds, company has to go through hassle. First of all bonds are advertised, further bondholders are taken in to confidence. This may cost more money as well as time, which is quite hectic.
One could easily avail the schemes like SBI, ICICI bank Personal loans or PNB loans for fulfilling their requirement. Opting for bonds may not be a good idea in emergency, but could be beneficial for long term engagement.