Every now and then we can all use a little financial help. Hand-outs from the "bank of mom," borrowing from a bank or issuing company bonds to generate cash flow are all ways to get an influx of cash when it is most needed. Companies tend to follow the strategy of the latter and issue bonds to generate cash flow as opposed to borrowing from a bank, but what are their reasons?
Bonds are a type of "IOU" issued by an institution such as companies, the Federal Government, or local government as a way to borrow cash to fund projects of their choosing. Investors purchase bonds and in return are the issuer guarantees some type of rate of return for their investment. Once the bond is purchased, the issuing agent then takes the money to finance expenses and use the money as they see fit. The investor then holds onto their bond until the maturity date and redeems it when the time has come.
Although many companies are legally entitled to borrow from a bank, the process is costly and time consuming. Companies issue bonds rather than borrow from banks because the bond process is viewed as less prohibitive, and a cheaper option than going the conventional bank loan route. The reason being is that banks place "covenants" (rules) on the money being borrowed that may limit the flexibility a company has in operating its business as the bank is trying to mitigate risks involved with the money they loaned to increase their odds of getting repaid.
Also, companies issue bonds rather than borrow from banks because bond holders do not put restrictions on the terms of the arrangement; the companies set up the rules for the bonds value and maturity. And the Bond markets tend to be a bit less rigid than the banks; so companies prefer to issue bonds versus borrowing from a bank as they get the money they require and the freedom they desire.
