Sometimes businesses may require long-term funds, but may not want to issue equity capital, as the company may not want to further dilute the ownership in the company. Other reasons making debt finance a better option include lesser cost and easier availability, particularly if the company has little or no existing debt finance. A major advantage of debt finance is that it provides tax relief on interest payments to the debtholders of the company (BPP Learning Media Ltd., 2013, p. 229).
If a company wants to raise debt finance by the issue of corporate bonds, it must decide whether the bonds will be redeemable or not and whether there will be any conversion rights of those bonds into equity shares of the company. Bonds are long-term debt capital raised by a company for which interest is paid at a fixed rate. Corporate bonds can be sold on the open market to institutional or individual investors, and they can even be placed privately.
Advantages of corporate bonds:
Bonds are a flexible way of raising debt capital, as they can be sold off completely if needed or converted to equity shares. They do no not dilute the value of existing shareholdings – unlike issuing additional shares. They also enable more cash to be retained in the business – as the redemption date for the corporate bonds can be several years after their issue date.
Disadvantage of corporate bonds:
Even though corporate bonds seem to have many unparalleled advantages, there are some disadvantages in issuing these bonds as well, like:
Regular interest payments to holders of these bonds have to be made regardless of the profit or loss of the company during the year.
Gearing levels may be increased by issuing bonds and a time may come when the corporate bonds have increased the gearing level and in turn the financial risk of the company to an unacceptable level (www.nibusinessinfo.co.uk, n.d.).
Recommendations for MTT to improve its chances of obtaining alternate sources of funding:
Midas Touch Technologies could raise finance from either debentures, bonds or equity shares by getting itself listed on a stock exchange. That would give it proper access to the capital markets. Moreover, by having its previous annual accounts audited and published as soon as it goes public will increase the chances of investors reading its annual accounts and wishing to invest in the company.
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