Final answer:
Short-term financing is preferred by many firms due to lower short-term interest rates and easier access compared to entering capital markets. Bank borrowing is more customized and suited for smaller firms, while larger firms may issue bonds for large-scale funding. Issuing stock is another capital option, though it involves trading some company control for the benefit of capital.
Step-by-step explanation:
Companies often opt for short-term financing over long-term options for several reasons. First, short-term interest rates are generally lower than long-term rates, making the cost of borrowing more affordable in the near term. Additionally, small and medium-sized enterprises may not have ready access to the capital markets to issue bonds or stocks; such processes can be complex and require a scale that smaller firms do not possess.
Bank borrowing is usually more tailored to the needs of individual firms, especially smaller ones, as banks can closely monitor the firms' financial activity through their accounts. For larger companies, issuing bonds can be a more suitable way to acquire financial capital because it allows them to fund significant investments, retire previous bonds, or facilitate acquisitions. However, the choice of financing is not absolute and can vary depending on the situation, with banks sometimes providing large loans and smaller firms occasionally issuing bonds.
The option for a company to raise capital also includes issuing stock, where companies trade equity for capital, but at the cost of giving up some control and taking on the responsibility to shareholders and a board of directors. This is often a less attractive option for firms that wish to maintain full control over their operations and decision-making processes.