Most founders who ask whether they could issue a bond are really asking two questions. Can the business carry fixed payments for several years? And will investors believe it can? This quick test covers both.
Answer each question with a straight yes or no. If you catch yourself saying “sort of”, count it as a no. Investors will.
The ten questions
- Does the business generate steady, predictable cash? A bond pays interest on fixed dates, whether you had a good quarter or not. Lumpy, project-by-project income makes that hard to promise.
- Do you have at least two years of filed accounts? Treat this as a rule of thumb, not a rule. Bond investors lend against a record, and a strong forecast does not replace a history they can check.
- Could you pay the interest out of today’s cash flow? If the interest only becomes affordable once the new money has done its job, investors are taking start-up risk for a lender’s reward.
- Can you say, in one sentence, where repayment comes from? Refinancing, the sale of an asset, retained profits, a listing. “We’ll be bigger by then” is not a source.
- Is the money for something specific and measurable? New vehicles, a second site, replacing more expensive debt. “General working capital” invites hard questions.
- Do you have assets that could be offered as security? Not every bond is secured. If yours is not, the rest of the story has to be stronger.
- Do you know what your existing lenders already have a claim over? Charges registered against the company decide where new investors would rank. Check Companies House before anyone else does.
- Would your current bank facility allow more borrowing? Many facilities restrict extra debt without the bank’s consent. Read the agreement now, not after a term sheet is agreed.
- Could you produce reliable management accounts every quarter? Bondholders expect regular reporting for the whole life of the bond, which may be several years.
- Is the board prepared to accept covenants? These are promises such as limits on further debt or on dividends. If any restriction at all is a deal-breaker, a bond probably is too.
How to read your score
8 to 10 yes. You have the basics of a bond issuer. The next job is structure: size, term, security and how interest is paid. It helps to compare the options side by side, as in our piece on choosing between a bond and a bank loan.
5 to 7 yes. A bond may work, but not yet in its strongest form. Look at which answers were no. Gaps in reporting, or in your knowledge of existing charges, can be fixed in weeks. Gaps in cash flow or track record take longer. They may point to a smaller first issue, or a different instrument such as a shorter-term loan note.
Under 5 yes. Debt is probably not the right tool at this stage. That is not a failure. It usually means the business needs equity to reach the point where fixed payments are safe, and a bond becomes a sensible option later.
The two questions that matter most
If you only have time to think hard about two questions, make them 3 and 4. Investors forgive a lot if the interest is clearly affordable from today’s business and the repayment route is believable. They forgive very little if either is missing, however good the rest of the story is.
Can you pay the interest from today’s cash, and do you know where the capital comes back from? Everything else is detail.
What to do next
- Put your filed accounts and your most recent management accounts in one folder.
- Download your company’s charges register from Companies House and list who holds what.
- Ask your bank, in writing, what consents a new debt issue would need.
- Draft a one-page note: amount, use of funds, interest cover and repayment source.
That one-page note will tell you more about your readiness than any score. If you can write it cleanly, you are ready for a proper conversation. If you cannot, you now know which part to work on. There is more on structure in our bonds articles.
This article is general information, not financial, legal or tax advice. If you are planning a raise, talk to BDM Capital.
Frequently asked questions
Yes. Private companies issue bonds and loan notes regularly. The instrument needs a clear repayment source, documentation and usually security, and the way it is offered to investors must comply with financial promotion rules.
Predictable cash flows that can service interest, assets or contracts that can support security, a defined use of funds and a plan for repayment or refinancing at maturity.
There is no legal minimum, but fixed costs of documentation, trustee and administration mean that very small issues are expensive relative to the money raised. Many advisers see a practical floor below which a loan note or bank facility is simpler.
