Final answer:
Firms have two main borrowing methods: banks and bonds. Bank borrowing is more customized and works better for small firms, while well-known firms often issue bonds.
Step-by-step explanation:
Firms have two main borrowing methods: banks and bonds. When a firm has a record of earning significant revenues and profits, it can make a credible promise to pay interest, allowing them to borrow money. Bank borrowing is more customized and works better for small firms because the bank can monitor sales and expenses accurately. On the other hand, well-known firms often issue bonds to raise financial capital for investments or to pay off old bonds. It is important to note that the use of banks for smaller loans and bonds for larger loans is not a strict rule.