Final answer:
Short-term bank loans are customized financial solutions primarily provided to depository institutions or small firms for brief periods, with varying programs like primary, secondary, and seasonal credit. These loans allow banks to efficiently manage liquidity and give firms tailored financial support. Large firms more often issue bonds, but the use of loans or bonds is not strictly based on the size of the loan or the firm.
Step-by-step explanation:
Short-term bank loans are usually arranged to meet various needs of depository institutions and businesses. Under the primary credit program, loans are extended for a very short term, typically overnight, to depository institutions in generally sound financial condition. Institutions not qualifying for primary credit may seek secondary credit for short-term liquidity needs or to alleviate severe financial difficulties. Additionally, seasonal credit is extended to smaller institutions experiencing predictable intra-year fluctuations.
For local banks, one benefit of such short-term loans is the reduced need to maintain significant extra funds, as the loan is intended to be held only briefly before it's sold and pooled into a financial security. This liquidity management technique helps improve the financial efficiency of the institution. Bank borrowing, being more customized than bond issuance, often fits better for relatively small firms. The bank's ability to monitor a firm's sales and expenses through their banking transactions facilitates a deeper understanding of the firm's financial health, tailoring the loan to better meet the firm's unique needs.
Large, well-known firms might prefer issuing bonds to raise capital for investments or to refinance existing obligations. Bank loans and bonds are not exclusively used based on the size of the firm or loan; banks sometimes extend large loans, and smaller firms may issue bonds. Finally, similar to an individual acquiring a loan for a major purchase, a firm borrows money promising to repay it with interest over an agreed period. If repayments are not met, the lender has legal recourse to recoup the funds.