So you've got a startup going that you're ready to take to the next level. But what if your capital isn't enough to finance those projects. Then you come across an idea to issue bonds as a way to acquire some additional financing. That's a smart move, but how old should your startup be for this method to work? Let's find out.

What does it mean to issue bonds?

Many startups that need to raise funds usually look to debt first. It's common for corporations to seek out debt as a way to finance their growth. By "issuing bonds," the company essentially puts bonds up for sale that an investor can purchase. They'll then have a contract with the company, acknowledging the debt. The company will regularly pay the investor interest payments. Then they'll repay the debt once the maturity date, or the contract's deadline, is reached.

When should you start issuing bonds?

If you're thinking about issuing bonds for your company, you'll want to evaluate the need for capital. Will the money you want to raise be put toward something that can give you a good return on the risk you're taking? If there is no specific reason to raise capital, there's no need to issue bonds.

But if you have mapped out projects that you know can help you increase your revenue substantially, then you should consider it. Here are some common reasons companies decide to issue bonds:

Room to grow

Photo by Isaac Smith on Unsplash

Every startup with a business plan has growth as an objective. Your company could be interested in scaling up production, adding or promoting staff, opening more subsidiaries, or increasing its market share. In these cases, your business will likely need additional funding. If this sounds like you, it might be the right time for your startup to issue bonds.

Freedom to innovate

In a free market, business is a competition. And what determines the survival of a company is its willingness to innovate and lead the way in creating or perfecting products. While being market-relevant might be a daunting task for many companies, holding leverage over competitors could be a viable survival tactic.

For a startup to be innovative, they usually need to invest in research and development. These departments require funding, but can affect your bottom line in the long run. If you're feeling confident in the returns, then issuing bonds is one way to accomplish this.

Why startups issue bonds

Photo by krakenimages on Unsplash

Business owners prefer to issue bonds because they're contract debts and not ownership sales. And offering shares gives the lender some part of the startup ownership. Debt is almost inevitable for most startup companies looking to level up, and issuing bonds has become a preferred choice since it offers mutual benefits for both the firm and its investors.

Benefits of issuing bonds

  • Issuing bonds helps protect ownership interests.
  • Bonds are flexible and can vary in value, payment terms, interest rate and also a timeline.
  • It allows the company to tailor the preferable bonds and give investors a variety of options.
  • The company can expand its pool of investors, creating a safer investment.
  • The bondholder can convert their bond into the company's stocks.
  • Interest payments from the bonds can be tax-deductible.

Disadvantages of issuing bonds

  • For startups to make their bonds attractive, they have high-interest rates that are costly to maintain.
  • If the startup defaults on the bond, the investor has the right to force the company into bankruptcy.
  • When a startup sells too many bonds, it can be tough to keep up, and many companies end up buying back the bonds.

All things considered, issuing bonds should be an option once your company is in a financially stable condition and ready to take on the next step.