Giving a Loan to a Business

Investments are a huge part of your finances, and they are not limited to stocks and mutual funds. I am a big fan of investing in bonds, which are loans to businesses. There are multiple ways to invest in bonds and each has a different risk and cost profile.

Corporate Bonds

The easiest way to give a loan to a company is through a corporate bond. When you invest in a bond issue, the company gets the funds and is responsible for paying you back. This can be a high risk investment depending on the company.

Bonds are rated by large analysis companies Standard and Poor’s (S&P), Moody’s, and Fitch. Each company has its own rating scale, but the most important distinctions are “investment grade” and “junk bonds.” The highest rated companies are BBB and higher (under the S&P system). Those companies are healthy and easily able to make debt payments. Companies rated below BBB are considered “high-yield debt” or “junk bonds.” They are less stable companies with some risk of non-repayment.

To invest in corporate bonds, you generally need a large starting investment. $1,000 is the minimum to invest in corporate bonds, but some may require investments of $10,000 or more.

Mutual Funds

A mutual fund is a managed basket of funds where you can invest in a pool with other investors. The funds are generally actively managed by investment professionals with a specialty in fixed income investments.

Each fund has a different set of fees and minimum investment. Each also has a unique investment mix based on the fund objectives. Some funds invest in a mix of junk bonds, while others may invest only in the highest rated debt. Others may invest only in municipal bonds or government bonds, or a mix, so make sure to read up on where your money is going.

Morningstar has a great description of bond funds and is a good resource to find ideal bond funds for your investment goals. Any online broker will also have a search tool to find bond funds that meet your goals.

ETFs

ETFs are similar to mutual funds, but can be traded similarly to a stock through your brokerage account. Each bond ETF has a unique goal and profile, like mutual funds, so you need to do your research before you buy in.

This is the best way to invest in corporate bonds if you are a beginner. ETFs are easy to buy and sell and have no minimum investment. Make sure to check on the fees before you buy in.