How can a business get additional funding by issuing securities and pre-ordering a product?

1. Bonds

When buying bonds, an investor lends you money, hoping to get it back with interest. Bonds are considered the second most popular securities among investors, and this is understandable. If an emergency situation does not happen, they not only guarantee themselves an income, albeit not high, but they can calculate it in advance because the interest rate is fixed and negotiated on the shore, as well as the debt repayment period. Low volatility is also taken into account.

However, when it comes to debt, trust comes to the fore. If investors have doubts about the profitability of the business or the prospects of the project, this mechanism will not be in demand. It makes sense to issue bonds for companies with a high credit of trust.

In the spring, Telegram attracted $ 1 billion from the placement of bonds. The face value of one security was $ 1000. Investors did not have enough bonds – the demand for them was twice as high as the supply, so a month and a half later the messenger carried out an additional placement of bonds and raised another $ 750 million.

The bond market has existed for a long time, more than 100 years ago Theodore Dreiser, in his novel The Financier, described the negative experience of speculation in the financial market. It is worth thinking about this even now, because all attempts to deceive an investor, as a rule, end in criminal liability.

It is worth remembering that all financial frauds will sooner or later be disclosed. You should not start your business fraudulently or for the sake of profit. Money cannot be the main goal of a business – later it turns out that this is a losing position. Entrepreneurship is a complex and multifaceted process, and the hardest part of it is staying decent.

Impact on the company and issue checklist

If you can convince investors of your solvency, it turned out, a lot of opportunities open up for the company. It can immediately attract a large number of funds and increase its investment attractiveness. And all this for a more favorable interest rate than if you had to take out a bank loan.

For example, Xiaomi intends to enter the electric vehicle market. By issuing bonds, it has already attracted about $ 1.2 billion. This choice of security is due not so much to its profitability as to its practicality: the country’s authorities control the issue of shares of Chinese companies on foreign exchanges, so Xiaomi had to borrow, but not from a bank, but from investors.

2. Promissory notes

It is easy to invest in promissory notes, and the profit is still predictable: how much and at what percentage you invested, and received so much.

In addition to the nominal differences from bonds – compulsory issue on paper, optional yield, exclusively cash realization – there are also more typical ones. For example, bills of exchange are discounted: they do not charge interest. Also, bills are more often issued against existing receivables, and not for a specific project, as is the case with bonds.

This tool is less popular in the investment market. It suits companies looking for an alternative to bank lending, as well as really large enterprises looking to increase their turnover. With the help of promissory notes, many are trying to deal with loans: they issue several securities with different maturities and gain a little time.

Bills of exchange are a convenient way of settlement between counterparties. It is better to issue them for a period of 3 to 12 months, with a standard yield of 12% per annum. It is also important to prescribe strict conditions for early repayment.

Bonds and bills are tools that are regularly and very competently used, for example, by large developers. They have good profitability, they have guarantees, and the asset balance is maintained.

Impact on the company and issue checklist

By issuing promissory notes, the company will be able to attract investment and reduce taxation to a minimum, as well as free itself from penalties and fines. Many businessmen, especially startups, love bills of exchange for the ability to defer payments. The relatively comfortable conditions of the billing mechanism are overshadowed by their high cost, taxes, and the risk of losses in case of early repayment. Specialists from a CPA firm can help you find out more information on this topic. 

It is not difficult to issue promissory notes, the main thing is to comply with the form established by law so that the security does not turn into an ordinary IOU. Inside the bill of exchange there should be:

  • name
  • commitment
  • payment details
  • The amount and due date
  • place of commitment
  • date and place of creation of the paper
  • bearer’s signature

In 2020, The Walt Disney Company had to understand all the intricacies of the billing scheme. She registered five bills and with their help raised $ 6 billion. The money will be used to pay off old loans, and the company expects to return the debt to the bill holders by 2050.

The last major deal with promissory notes with the participation of our company was completed in July. The total amount of issued securities exceeded 210 million rubles. All participants in the transaction were satisfied, and we managed to earn 0.5% on it.

3. Options

An option agreement is not a security in itself. Its value is inextricably linked with some kind of asset. In fact, this is the right to a conditional purchase of any commodity, stock, metal. The option fixes the value and does not oblige the investor to implement the agreement within a specific time frame.

Trust in the company also plays an important role here. Most often, an investor chooses this instrument as passive income, and this is possible only with full confidence in the business owner and his team.

Impact on the company and issue checklist

This form of investment brings the investor closer to the company a little more than buying, say, bonds. However, his behavior is always predictable and regulated: all the powers of partners and the rules of enterprise management are reflected in the company’s charter.

He also helps to resolve any controversial issues, so the more detailed the document is written, the more protected both founders and managers feel.

4. Pre-order

Another way for an investor to invest in your business is to pre-order at the lowest price of the final product. An investor who is not indifferent to your company will gladly take advantage of the exclusive opportunity to receive a product and evaluate it among the first. A similar scheme is widespread on crowdfunding platforms and is suitable for companies in their early stages of development.

Impact on the company

The pre-order system will help not only to raise funds for the sale of the product even before its release but also to pre-study the demand, as well as to get customers. It is rather difficult to attract large sums in this way, and the mechanism itself is quite risky for both parties – the plan may turn out to be impracticable for a variety of reasons.

Having become firmly established in the desire to attract new sources of funding, it is necessary to adequately assess their own capabilities: product prospects, audience interest. Sometimes this is possible only with the help of specialists, without whom the emission costs may not pay off, the product will be unclaimed, and the business plan will fail.

Securities may indeed be more profitable than bank loans, but their positive impact is not typical for every industry and not for every business model. It seems to me that in the near future, promissory notes and bonds will be good tools for financing startups.