Borrowing: Banks and Bonds

When a firm has a record of at least earning significant revenues, and better still of earning profits, the firm

can make a credible promise to pay interest, and so it becomes possible for the firm to borrow money. Firms

have two main borrowing methods: banks and bonds.

A bank loan for a firm works in much the same way as a loan for an individual who is buying a car or a house.

The firm borrows an amount of money and then promises to repay it, including some rate of interest, over a

predetermined period of time. If the firm fails to make its loan payments, the bank (or banks) can often take
the firm to court and require it to sell its buildings or equipment to make the loan payments.

Another source of financial capital is a bond. A bond is a financial contract: a borrower agrees to repay the

amount that it borrowed and also an interest rate over a period of time in the future. A corporate bond is
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