If you own a business, loans aren't the only way to get financing. You can also sell stocks and bonds to investors. Setting these up can be challenging, and you want to consult with a securities law attorney. One of the decisions you will need to make while working with this professional is what type of bonds do you want.
Here's a look at several types of bonds and a brief description of how they work.
1. Collateral Trust Bond
This is one of the most common types of corporate securities. With this type of bond, the investor pays you money upfront, and then, as your business grows and you pay dividends to the bondholders. The bonds are backed by other stocks and bonds that are held by your corporation.
2. Mortgage Bond
If your investors are skeptical about investing in intangible securities, you may want to talk with your corporate securities lawyer about setting up mortgage bonds. Again, these bonds work on the principle that your investors provide money upfront, they receive dividends, and when the bond finally matures, they can cash it in.
The risk for investors, however, is that if your business becomes insolvent, they won't be able to cash in. To reduce that risk, these bonds are based on property owned by your business. You can't issue this type of corporate security unless your corporation has full ownership or ample equity in property.
3. Convertible Bond
This type of bond is a hybrid between a bond and a stock. To review, a bond is a debt instrument. It's a special way for corporations or other organizations such as governments to borrow money from multiple investors rather than a single bank.
A stock, however, is a way to share ownership of your company with potential investors. Instead of being a debt instrument, it's an equity instrument. When your corporation offers convertible bonds, they start as bonds, but instead of cashing them out at maturity, your investors convert them into stocks.
4. Income Bond
These bonds are just linked to the income made by your corporation. If you don't have earnings, your investors can't collect dividends or earnings. Because these bonds are backed by less secure collateral than the above examples, you may need to provide more generous dividends to convince investors to take the risk.
These are all types of corporate bonds, which simply refers to bonds issued by corporations. Once you choose one of these categories, you need to make other decisions such as whether you want to have a fixed interest rate or a variable interest rate. Contact a securities lawyer, such as at carter west, for help.