Question

Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities? Why?

Answer 1

Most likely smaller firms that are not well known use bank financing rather than issuing bonds or stocks to finance their activities.The reason for this is that it is difficult for such firms to issue bonds or stocks as their are very few buyers available for them. Investors rather prefer large and known firms to invest in the stocks and bonds. Even if these firms do find an investor for stocks or bonds, they will get very less valuation and thus financing wll become very costly.

Thus, only those limited banks that cater for smaller firms are viable options for these small firms.