We've come a long way from the days when the money supply consisted of metallic coins and when borrowing was undertaken to cover dire emergencies or finance the needs of the ruling class. Today, the acceptance of debt as a suitable means of financing and investing is generally taken for granted and a market economy, similar to the one that exists in the United States, could not function without the extensive use of credit. Credit facilitates the transfer of money by placing it where it will be used more efficiently and effectively, thereby increasing its productivity. In today's economy, one of the leading ways expenditures are financed is through lending. They also anticipate that as a result of borrowing, their earning power will be enlarged and they will be able to service the debt from the resulting higher income.
Businesses borrow for different purposes and for different time periods.
Short-term borrowing can be used to cover temporary increases in inventories and other working capital needs. It can also be used to pay taxes or the money can be borrowed with anticipation of more permanent financing. Long-term borrowing can be used for expansion or renovation or to cover a permanent rise in working capital requirements. Commercial banks offer a wide range of lending services. Generally, large city banks make more business loans than the smaller, rural banks, which may lean towards agricultural and consumer loans.