In the world of corporate bonds, risk management is everything.
For investors, one of the biggest concerns is whether the issuer will actually repay its debt. For companies, maintaining a strong credit profile while managing debt obligations can make or break future fundraising efforts.
That’s where sinking funds come in.
A sinking fund is a reserve account where money is set aside regularly to repay debt or replace a major asset. Governments and companies use sinking funds to reduce risk and ensure funds are available for future payments.
A sinking fund provides added security for investors in a corporate bond issue. It significantly reduces the risk of default by setting aside funds to repay the bonds at maturity. In essence, the amount the company needs to pay at maturity is much smaller when a sinking fund is in place.
Companies use budgeting and forecasting software to estimate future revenue across operations, create budgets for departments, and understand where they should put their money.
Sinking fund protection is a feature in some bonds that limits or modifies the issuer's ability to redeem bonds through a sinking fund mechanism. It benefits bondholders by restricting early redemption and protecting against unfavorable interest rates.
Not all sinking funds are structured the same way. Depending on the bond agreement (known as the indenture), the sinking fund can be mandatory, optional, or tied to specific market conditions. Here are the main types companies may use when issuing corporate bonds:
| Type of sinking fund | What it is | How it’s used | Example use case |
| Specific-purpose sinking fund | Funds set aside for a defined project or goal | Dedicated to repaying debt tied to a specific initiative | Bonds issued to fund a new HQ; sinking fund used solely for that project |
| Regular payment sinking fund | Systematic debt repayment over time | Fixed contributions on a set schedule (e.g., quarterly) | Company deposits funds yearly to retire bonds in tranches |
| Purchase back sinking fund | Opportunistic bond buybacks | Bonds repurchased from the open market, often below face value | Firm buys back bonds at a discount during market downturn |
| Callable bond | Early redemption of callable bonds | Sinking fund used if the issuer “calls” bonds before maturity | Issuer calls bonds early and pays bondholders using the sinking fund |
Although they all involve setting aside money, a sinking fund, an emergency fund, and a savings account serve very different purposes in financial planning, particularly in corporate finance vs. personal finance. Here’s how they compare:
| Feature | Sinking fund | Emergency fund | Savings account |
| Primary purpose | Gradually repay a specific debt (e.g., bond or loan) | Cover unexpected expenses (e.g., job loss, medical emergency) | Save for general short- or long-term financial goals |
| Use case | Corporate debt repayment strategy | Personal financial safety net | Flexible savings, anything from a vacation to a down payment |
| Access to funds | Restricted; managed by a trustee or tied to a debt instrument | Fully liquid and quickly accessible | Highly liquid, often accessible via ATM or online |
| Returns/interest | Usually earns minimal or no interest | May earn a small interest in a savings account | Earns interest depending on the bank/product |
| Time horizon | Medium to long-term, tied to bond/debt maturity schedule | Short-term, for sudden emergencies | Varies; short to long-term |
| Typical owner | Businesses or municipalities | Individuals or households | Individuals, households, businesses |
| Is it legally required? | Often included in bond indentures (contractually obligated for issuers) | Not legally required, but highly recommended | No, completely optional |
Sinking funds serve as a financial bridge between stability and strategy. For companies, they ease debt management and improve borrowing terms. For investors, they offer an added layer of protection and predictability. Below, we break down the key advantages for each side of the bond equation.
These are the main advantages for an issuer:
Below are the key benefits for an investor:
Lower risk of default: A predictable repayment schedule builds trust and makes the bond more attractive to conservative investors. When payments are made incrementally, there’s less pressure (and uncertainty) at the bond’s maturity date.
More predictable cash flows: Because many sinking funds retire a portion of the debt over time, investors may receive partial principal repayments during the bond’s life, not just at the end. This offers improved liquidity and more consistent cash flow.
Higher market appeal and liquidity: Bonds with sinking fund provisions often have broader appeal, especially to institutional investors and pension funds seeking structured debt vehicles. Greater demand can lead to higher bond prices and better resale liquidity in secondary markets.
Better risk-adjusted yield: Although bonds with sinking funds may offer slightly lower nominal yields than higher-risk options, they often present a better risk-adjusted return — especially during economic uncertainty.
Investors may accept a slightly lower coupon in exchange for the added protection of a sinking fund mechanism.
While sinking funds offer several advantages to both issuers and investors, they’re not without potential downsides. Depending on how the provision is structured, it can introduce uncertainty, reduced returns, and structural complexity.
Below are the most common risks and challenges to consider.
Companies need to plan effectively for future business activities and operations, and budgeting and forecasting software enable businesses to build a plan that supports their future business operations. G2 helps businesses find budgeting and forecasting software solutions that facilitate revenue and expense estimation, budget creation, and profitability oversight.
To qualify for inclusion in the budgeting and forecasting category, a product must:
* Below are the top five leading budgeting and forecasting software platforms from G2’s Fall 2025 Grid® Report. Some reviews may be edited for clarity.
Anaplan’s enterprise cloud software aligns businesses with their objectives and resources to drive better outcomes. Anaplan’s proprietary Hyperblock™ technology produces ultra-fast calculations, even for large datasets. This means businesses make quicker decisions as they navigate evolving marketing conditions and challenges. Organizations that use Anaplan can bring more key stakeholders into the decision-making process for better collaboration.
“Anaplan is a type of system that, if implemented successfully, sells itself inside the company. The more functions you get on the platform, the larger the benefit of having such a platform can be. It is very simple to integrate and synchronize different areas of Anaplan models with each other, like making your supply chain application deliver data automatically to your finance application by doing away with long email chains of finding the correct version of the plan to use.
It also extends to third-party sources. Anaplan supports easy integration possibilities with dedicated analytics tools or allows for simple integration with source systems. It's fast and reliable and does not need a lot of IT resources to set up.”
- Anaplan review, Andris I.
“Dashboard functionality is not as flexible as Excel. For example, the font size is not adjustable. Cell highlighting by the user is not possible. The line item alias is not there; we must create a separate line item to accommodate the reporting requirement.”
- Anaplan review, Ivan L.
IBM Planning Analytics is a powerful budgeting and forecasting platform built on TM1, designed to handle complex, enterprise-scale financial planning. It supports driver-based modeling, rolling forecasts, and real-time scenario analysis across departments.
“IBM Planning Analytics stands out for its impressive blend of flexibility and performance. The integration of TM1 with a user-friendly interface enables real-time data analysis and supports quicker decision-making. I also value how easily I can create dynamic dashboards and carry out multidimensional modeling. Its automation features greatly minimize manual work, which enhances both efficiency and accuracy across planning, forecasting, and reporting tasks.”
- IBM Planning Analytics review, Nilesh P.
“One thing I don't like about TM1 is the complexity involved in scaling models across different business units. While TM1 offers flexibility, maintaining consistency and performance across large, decentralized teams can be challenging, especially when dealing with complex, interdependent calculations and data sources.”
- IBM Planning Analytics review, Vini K.
Vena is a budgeting and forecasting solution that combines Excel’s interface with a centralized database, workflow automation, and version control. It supports integrated planning, rolling forecasts, and financial consolidation in a highly collaborative environment.
“As a financial analyst, part of the sales team, in my organisation, this Excel-based interface has made my processes easier and automated with strong collaboration. This Vena tool is extremely helpful for those who work in financial companies like myself, by coordinating enterprise finance teams like budgeting, forecasting, making it a more intuitive and easier process to work on.”
- Vena review, Haripriya R.
“On the other hand, some advanced features require a bit of time to master, and the price can be a barrier for small businesses. When the models become very large, the loading time can also increase.”
- Vena review, Arthur C.
Mosaic Tech is a strategic finance platform with real-time analytics data and planning capabilities that empower businesses to make decisions faster. Mosaic Tech automates data integrations, consolidates financial and operational data, refines financial processes to save time, and provides interactive modeling for cross-functional team alignment. Mosaic Tech aims to help businesses plan for the future through a strategic financial lens.
“The team at Mosaic Tech has built a truly practical SaaS software solution that allows us to integrate all our data sources needed to forecast the entirety of our SaaS business in one platform. Our ADP, Sage Intacct, and Salesforce instances were all successfully connected in about a week. Setting up our financial statements followed intuitive formatting and tying out processes. Our assigned integration team was very responsive in helping us establish our initial forecast model, which allowed us to leave our old spreadsheet models in the past.”
- Mosaic Tech review, Benjamin A.
“Report formatting is somewhat rigid. I can’t export reports as PDFs and would also like to auto-schedule reports for email recipients. Additionally, models don't export to Excel intact, making it difficult to share with investors.”
- Mosaic Tech review, Craig H.
Planful delivers continuous budgeting, forecasting, and financial planning in one platform. It enables users to run rolling forecasts, plan across multiple business units, and accelerate month-end reporting with real-time data integration and scenario modeling.
“Planful provides a lot of flexibility. From reporting to planning, there are always multiple ways to do something, and Planful is almost always flexible enough to do it how you prefer. Reporting is great!”
- Planful review, Shane T.
“Currently, Planful is not connected to our ERP system, which means we still need to manually upload a significant amount of data. This adds extra steps to our workflow and limits the potential for real-time updates. We’re hopeful that moving forward, we can establish a direct integration with our ERP system to streamline the process and fully leverage Planful’s automation capabilities.”
- Planful review, Veronica Y.
Got more questions? We have the answers.
No. While both involve repaying debt over time, amortization typically refers to scheduled principal and interest payments on loans, whereas a sinking fund is a separate reserve set aside specifically to gradually retire bonds or debt instruments.
While most common in bond repayment, companies can also use sinking funds to retire other forms of long-term debt, including term loans or lease obligations.
Sinking funds appear as non-current assets (or sometimes restricted cash) on the balance sheet, depending on how the funds are managed and when the obligation is due.
No. Sinking fund provisions are optional and vary by bond issue. High-risk or long-term bonds are more likely to include them to attract investors and reduce perceived credit risk.
Not without bondholder approval. Sinking fund terms are contractually set in the bond indenture and cannot be unilaterally changed by the issuer once the bond is issued.
Sinking funds provide security to increase the safety of investing in a bond. However, no matter the precautions you’ve taken, there’s always a chance of a storm that can steer you off course. You can breathe a little easier knowing that your sinking fund is there to float you through any kind of weather.
Want to dive deeper into how companies finance business operations? Learn more about capital structure.
This article was originally published in 2024. It has been updated with new information.
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