Final answer:
In choosing between deal financing and direct lending, firms must weigh the advantages of control and lack of shareholder obligations against the commitment to regular interest payments. Small firms may benefit more from bank borrowing due to the personalized nature of such loans, while large firms might prefer issuing bonds to raise capital.
Step-by-step explanation:
When a firm needs to access financial capital, it may consider options such as deal financing or direct lending. Deal financing can consist of borrowing from a bank or issuing bonds. It provides a firm with the advantage of maintaining more control over its operations, as it does not require selling company ownership and is thus not subject to shareholders. However, this method involves committing to scheduled interest payments, a commitment that must be met whether or not the firm's income is sufficient to cover these payments.
On the other hand, issuing stock, while it may relieve some pressure in terms of scheduled payments, involves selling off ownership in the firm to the public. This leads to a responsibility toward a board of directors and shareholders. For relatively small firms, bank borrowing is often more customized and may be more beneficial due to the close relationship banks can maintain with the firm through monitoring of sales and expenses. For larger or more well-known firms, issuing bonds is common to raise capital for various purposes, despite the firm's size and reputation not being an absolute determining factor for the source of a loan.