who is more efficient, to borrow money (debt) or to sell bonds (stocks)?

Answer 1

First of all your question is little wrong. Stock is not selling bonds since the seller of stock has no obligation to repay. So stock is not a secured investment which makes it less risky for the borrower. It is also considered as the cheapest form of investment and less riskier.
On the other hand, bonds have obligation attached to the borrower. He is bound to pay back the amount he borrows either directly or through bonds. It is secured against the assets he owns. It is risky since he is bound to pay interest annually or semi annully or quarterly to the lender. It is risky since if there is a bad year for the borrower, then risk of frorclosure is the only alternative and assets will be sold by the lender or the trustee appointed by the bankruptcy judge and the amount will be repatriated to the lender. Stock has no problem like that, even if the borrower goes bankrupt he need not have to pay back the amount borrowed by him.
Both has it's advantages and disadvantages. The more stocks you have the return falls. So a certain amount of bonds are mixed up with the stock to form a combination to finance a business. Stock financing is considered as equity and the lender gets a part ownership in the business in return for accepting the risk of forclosure where as the lender of bonds don't take that risk so he gets only assured returns and no ownership or part in decision making. Stock lender gets a hand in decision making. We cannot for sure say which is efficient and which less efficient. Both have advantages and disadvantages. The fact is efficiently running organizations create a hybrid financial structure depending on the risk undertaken by the business.

Answer 2

First off, the question should be rephrased. The choices are debt financing (borrowing from banks or selling bonds) vs. equity financing (selling stock).

The answer usually has nothing to do with efficiency. There are plenty of companies out there that are so risky that debt financing is unacceptable to potential creditors regardless of terms. Those companies end up selling equity.

If your business has stable cash flows or substantial real assets, you can consider borrowing. Other things being equal, bank loans will probably have slightly higher interest rate, but you won't have to hire any underwriters, lawyers, accountants, or printers (which in case of a bond offering may easily cost you over a million dollars). The larger your borrowing needs, the more attractive bonds are compared to bank loans.

Answer 3

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