Final answer:
A grant is nonequity funding that doesn't require repayment, unlike loans or bonds. Firms that need financial capital for investment can borrow money through banks or issuing bonds, which obligate them to repay the principal with interest. Investors provide financial capital in exchange for a rate of return.
Step-by-step explanation:
A grant is a form of financial support that is not expected to be repaid. It's different from a loan or a bond, which both require repayment with interest. Providers of financial capital through saving generally expect to receive a rate of return on their investments.
Conversely, those who demand financial capital, such as firms, expect to pay a rate of return to the investors. When a firm starts earning significant revenues or profits, it can then engage in borrowing money by credible promises to pay back the principal with interest.
This can be done through financial institutions like banks or through issuing bonds. A bond is a formal financial agreement where the borrower agrees to pay back the borrowed amount plus interest over a specified period.
For businesses such as startups or large corporations that lack sufficient internal funds for investments, obtaining financial capital from outside investors becomes necessary. These investments are essential for growth and are financed through interest-bearing instruments, where the investors expect to derive a rate of return.