Finance is an important and very critical aspect. We all know a country whose financial markets function poorly is likely to collapse in its economical and financial activity. Let’s first get started with Indirect finance. Indirect finance occurs when borrowers either a company or individuals borrow money from the bank or any third party that is unlinked. This is different from direct finance because, in Indirect finance, we borrow the asset or money from the investors.
When the transfer of funds is being done. The transfer security of indirect funds is a must for a borrower and the lender. What the financial intermediation does that it transparently allows the borrowers to collect the money through their team and it would look like that the borrower took the loan from some financial markets.
For example, a business borrows money from a bank, rather than directly from investors. The bank charges the company interest on the loan, thereby paying interest to its own investors and depositors.
Direct vs. Indirect Financing
Let’s compare the direct and indirect financing. Finance is an important part of a country’s economy. Financing the small to large level businesses. Investment in large and beginner-level firms, taking care of equity, debt and credit management and buying the art of security. Dealing with bonds, mutual funds, and stocks. These things come under the umbrella of Finance.
- Direct Financing occurs when the borrower either an individual or a company takes money from the financial market directly.
- It ensures funds security.
- This involves dealers, investors, investment banks, and welfare loaners.
- Indirect financing occurs when we borrow the amount from the third party.
- It does not ensure funds security.
- It is converted into direct finance later.
Also, In indirect financing, there is the involvement of one financial instrument between the lender and borrower, while in indirect financing, there are two instruments involved; one between lenders and financial intermediaries and the other between financial intermediaries and borrowers.
Which of the following can be described as involving indirect finance
- This occurs when a big or small level registered corporation borrows the money from the bank. The corporation is bound to give access of employee records and revenue reports to the bank.
- When people invest in mutual funds. This is a sort of indirect finance because the transparency factor becomes vital here. The channel is only you and the mutual fund provider.
Which of the following can be described as involving direct finance
A corporation issues new shares of stock.
- When the corporation is abode by the loans taken from investors. It issues new stocks often. The shares of stocks then are bought the public.
A corporation buys commercial paper issued by another corporation.
- It occurs when a corporation is linked with another corporation to ease its loan heftiness. The commercial documentation is signed to work collaboratively in terms of financing each other, staff and resource sharing.
Both Direct and Indirect finance have their own pros and cons. The individuals and companies are very meticulous in choosing any of these two. Most of the audience prefer to choose Indirect finance. Because a crucial factor that we have in Indirect finance unlike direct is that we deal with the proper channel for borrowing our funds. Unlike in Direct finance, we are restricted to get loans from potential investors. Taking money from potential investors comes up with some bad features like equity sharing, liquidation, dominance and involvement of investors.