Difference Between Loans and Bonds: Know it all and choose the best option

Updated on: 25 Apr 2024

Understanding the difference between loans and bonds when in need of capital is crucial for any businessperson. While both of these options can secure funds to address planned or unforeseen financial needs, they have some major differences.

Read on to learn about these financial instruments and how to choose the best option.

An Overview of Loans

A loan is a common type of credit that you can get to meet a wide variety of financial. You can apply for a loan from a financial institution and many offer these products. You can repay it comfortably through EMIs at a set rate over a suitable tenure.

The various types include:

Term loans
Professional loans
Business loans
Working Capital Loans
Machinery loans

This list isn’t exhaustive, but you can opt for all these provisions to raise capital for a business. The key upside here is that you enjoy flexible terms with most loans. Depending on your business and the lender, you can easily get a tailored loan to manage your expenses.

In fact, some of the key benefits of loans include:

Simple eligibility criteria related to the financial standing of the enterprise, its vintage and creditworthiness.
Lenders offer generous sanctions and without usage restrictions, in some cases.
Loan interest rates are fairly competitive with secured offerings a lot more cost-efficient
Quick disbursals ensure access to capital, even in a pinch

Also Read: Is a Personal Loan a Good Option for Investing Purposes?

An Overview of Bonds

Bonds are debt instruments that a company can issue to financial markets to raise capital. Here, the company pays interest regularly and over a lengthy tenure, until maturity. At maturity, the issuing company promises to repay the investor in full.

Typically, bonds have a long duration, going up to 40 years, depending on the issuing entity. Companies and the government can issue bonds to raise funds in this manner, and these entities decide the terms applicable.

So, for a company, issuing bonds can serve as a viable route to raise capital besides taking on debt. Some of the reasons why issuing bonds is a viable choice are:

Interest payable on bonds may be lower
Entities can raise money without giving up equity
Companies with good reputations can access capital quickly after issuing bonds
Bonds allow companies to enjoy flexibility due to the various types of bonds they can offer

Bonds Vs Loans

Check this table out to know the difference between loans and bonds:

Basis of Difference	Bonds	Loans
Meaning	Companies issue bonds to investors, who, upon purchase, agree to lend money for a set tenure. The company can agree to pay interest, (coupon) and must repay the full bond value at maturity	Loans are a credit instrument that companies can opt for to access funds. These are offered by financial institutions and have set sanction limits, interest rates, and other costs. In some cases, the sanction received may also have usage restrictions
Tenure	Bonds durations can go up to 40 years, depending on the issuing entity	Companies can get loans for short-term as well as long-term, depending on the instrument and the lender’s policies
Interest Rate	Bonds have fixed interest rates	Loans can have fixed as well as variable rates
Source	Bonds are issued by companies or the government	Financial institutions like banks and NBFCs provide loans
Terms	The bond-issuing company decides the bond terms	The financial institution decides the loan terms
Possibility of Trade	Bonds can be bought and sold in the secondary market, at varying prices	Loans can’t be traded and companies are bound by contract to the lending institution

Understanding the bonds vs loans comparison is important for any entrepreneur looking to raise capital. Deciding the right way to raise funds isn’t easy, as both options have their merits. Issuing bonds is ideal for companies with high credit ratings, but it isn’t the quickest way to get capital.

Here, a loan comes out ahead as lenders offer quick and instant disbursals. Moreover, entrepreneurs can get tailored offerings and even negotiate for better terms.

For a short-term loan, consider getting a Fibe Instant Personal Loan. This way, you can get up to ₹5 lakhs at attractive interest rates, that too within a few hours. Install our Instant Loan App today or register on our website to get access to funds with minimal formalities.

FAQs on the Difference Between Loans and Bonds

How is a loan different from a bond?

The main difference between loans and bonds is that the former is a credit instrument offered by a financial institution, while the latter is an instrument a company issues to investors to raise funds.