Imagine a company, Bright Future Electronics, wants to expand its factory to produce more gadgets. To achieve this, it needs ₹50 crore but doesn’t have enough cash. What can it do? It has an option to raise funds through corporate debt by issuing bonds, taking loans, and adopting debentures.
All these instruments create avenues for companies like Bright Future Electronics to raise funds but have their own features, risks, and other relative benefits. Debt consolidation tools can also serve companies in managing multiple debts more effectively by combining such debts into a single loan for obtaining lower interest rates and simplifying repayments.
What is Corporate Debt?
Corporate debt is the money borrowed by the company for financing itself. It uses bonds, loans, and debentures as forms of raising investments rather than the savings. Debt consolidation enables an important role in corporate finance.
It helps to organize and streamline repayments in situations where there is more than one kind of indebtedness. The rating agency estimates that corporate debt worth at least ₹10.52 lakh crore could be at risk of default over the next three years. Now, we are getting on to the three most common types of corporate debt:
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What are Bonds?
Bonds are like promises. A company raises money by borrowing it from investors with the assurance of paying it back with interest over a series of agreed-upon years.
Key Features of Bonds
- Security: Secured through assets such as buildings or unsecured and based on company reputation.
- Maturity: Long-term instrument from 5 to 30 years.
- Interest Payments: Fixed interest payments to investors, in predictable manner.
Example:
If Bright Future Electronics issues 5,000 bonds at ₹10,000 each with a 5% annual interest rate, the company raises ₹5 crore. Investors get ₹500 yearly per bond as interest for the loan they’ve given the company.
Why Do Companies Prefer Bonds?
Bonds are a popular choice because they allow companies to borrow large sums of money without giving up ownership.
What are Debentures?
Debentures can be defined as unsecured loans. This means that these loans are not backed up by company assets, but solely on the credit rating of the company.
Key Features of Debentures
- Higher Interest: Since there’s no collateral, companies offer higher interest rates to attract investors.
- Flexibility: Some debentures can be converted into company shares.
- Marketability: Such types of debentures may be traded on stock exchanges for easy buying or selling.
Example:
If Bright Future Electronics issues 1,000 debentures at ₹50,000 each with a 7% interest rate, the company raises ₹5 crore. Investors get ₹3,500 annually as interest per debenture, which is higher than bonds because of the higher risk.
What are Loans?
Loans are the simplest form of corporate debt. Companies borrow money directly from banks or financial institutions.
Key Features of Loans
- Secured vs. Unsecured: Secured Loan is against collateral, like property, unsecured Loan is based on company’s credit.
- Repayment Terms: May differ from each other based on negotiations between parties as to its repayment scheme.
- Purpose: Banks provide loans for immediate needs; acquiring raw materials or expansion of operations may be examples.
For Example, Bright Future Electronics may take a loan of ₹5 crores from the bank at an 8% interest rate and then repay the principal amount within the time period, say for 10 years.
Comparison Table of Bonds, Debentures, and Loans
| Feature | Bonds | Debentures | Loans |
| Security | Can be secured or unsecured | Unsecured | Can be secured or unsecured |
| Maturity | Long-term (5–30 years) | Medium-term (5–10 years) | Varies widely |
| Interest Payments | Fixed and lower | Higher due to higher risk | Based on lender agreement |
| Priority in Liquidation | Higher for secured bonds | Lower | Depends on security type |
| Marketability | Tradable | Tradable | Usually not tradable |
Conclusion
Corporate debt, through bonds, loans, or debentures, plays a crucial role in helping companies grow while offering investors different opportunities to earn returns. In this case, there could be bonds for safety, debentures for flexibility, and loans for quick financing. Each has its own merit.
Debt consolidation also alleviates in making repayments for companies to think and act though growing. All this needs to be understood by companies and investors alike for successful navigation through the complicated maze of finance.
