Scenario: a founder weighs a bank loan against a bond

This is an illustrative scenario. The company and figures are invented.

Priya runs Greyfield Cold Store, a fictional refrigerated warehousing business in the Midlands. She needs £3m to build a second site, and she has two routes on the table. This is how she weighs a bank loan against a bond, step by step.

Step 1: Be clear about the need

Greyfield is profitable, with steady contracts from food distributors. The new site will take about a year to build and another six months to fill. Until then it earns nothing. The company already has a £1.5m term loan with its bank, secured by a debenture over the company’s assets.

Priya writes the need down in one line: £3m, for one asset, which starts paying its way roughly 18 months after the money arrives. That timing turns out to be the whole decision.

Step 2: Hear the bank’s offer

The bank is supportive and quick. It offers £2m, not £3m, at a lower interest rate than any bond would carry. The catch is the shape. Capital repayments start after six months. There are covenants on interest cover and on total debt relative to earnings. And the remaining £1m would have to come from somewhere else.

Step 3: Look at the bond option

Her adviser outlines a £3m bond with a five-year term. Interest would be paid twice a year at a fixed rate, higher than the bank’s. No capital would be repaid until the end of year five. Investors would want security, which means a second-ranking charge behind the bank, the bank’s consent and an agreement between the two setting out who ranks where.

The bond also costs more to put in place: legal documents, a trustee to act for bondholders, and three or four months of work. Bondholders would expect quarterly reporting for the full five years.

Step 4: Model the cash, month by month

Priya builds both options into her model. The bank route looks cheaper on paper. But capital repayments begin a full year before the new site earns anything, and cash gets uncomfortably tight between months 6 and 18. One delayed build stage and she would be asking the bank for a waiver.

The bond route costs more in interest each year. But nothing is repaid until the site has been trading for over three years, and the full £3m arrives in one go.

The cheaper loan was the riskier one, because its repayments arrived before the income did.

Step 5: Answer the repayment question

A bond pushes the problem to year five, so Priya has to solve it now. Her plan is to refinance with bank debt once the new site is full and has two years of trading behind it. To support that, she asks for an early redemption option, so the company can repay the bond after three years if bank terms are better by then. Our piece on early redemption and call options explains how that usually works.

Step 6: Decide, and accept the trade-offs

She chooses the bond. She accepts the higher interest, the set-up costs, the reporting and the work of getting her bank’s consent. In return she gets the full amount, a repayment shape that matches the project, and a clear route to cheaper debt later.

What to take from it

• Compare cash timing, not just the headline rate. The question is when payments fall, not only how big they are.
• Start with the asset. When it starts earning tells you which debt shape fits.
• Know what your existing lender already holds. Their security and consent rights shape every other option.
• Plan the exit on day one. A bond with no repayment plan is just a later problem.

For a side-by-side view of the two instruments, see bond or bank loan. Then sketch your own project the way Priya did: the need, the timing, and what each option does to your cash month by month.

This article is general information, not financial, legal or tax advice. If you are planning a raise, talk to BDM Capital.

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