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Bonds and Debentures

Renjith Sreekumar (29 Points)

14 April 2020

Is it better for a private limited company to raise money by bank loans or debts funds or debentures ?

Can you let me know how to raise money by debt fund and debentures ?

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 29 April 2020

Is it for working capital or for a project?

If it is for working capital, then use overdraft or loan as this is the common source of finance.

If it is for some investment project, then contact your advisor to do an investment appraisal. This will help you to understand the costs associated with raising loans, debt funds or debentures. The costs for debt and debentures could be found online. Or simply discount rate for loans is ‘interest*(1-corporate tax rate) and discount rate for debentures is use the above formula ‘I(1-t)+(F-P/n)/(F+P/2)’ where F denotes redemption price per debenture, N denotes maturity period and P denotes net amount realised per debenture. Since your planning to take a loan on mutual funds, the first formula is applicable to find its discount rate.

Once your done with finding the discount rates, it is time if you can pay them back through your company’s returns. So, choose the source of finance whose discount rate is the lowest. For example, if loan discount rate is 10%, debenture discount rate is 15% and debt funds discount rate is 16%, then choose the loan. Why? Because, you will be less burdened by interest payments and Cashflows will not reduce largely thereby maximising your profits.