Question

what is the difference between direct and indirect finance? discuss the reasons why a firm might choose each method. discuss the reasons why a saver might choose each method.

Answer 1

Direct finance :

Direct financing is a method where institutions or firms directly borrow funds from the financial markets without any intermediary. Here, lenders lend their assets or borrowings directlly to the borrower. The important role in direct financing is played by brokers, dealers and investment banks.

Indirect finance :-

In the indirect financing , an intermediary is involved between the lender and the borrower. It can be chosen for the purpose of business, portant purchases or other firm's investments. It is done via methods like equity financing, credit arrangements and purchasing securities (stocks and bonds) which are already issued.

why a firm might choose direct financing ?

A firm might opt for direct financing to avoid intermediary charges . Another advantage of choosing it is to diversify funding and choosing different options in order to reduce exposure and increase flexibility . It also enhances firm's reputation inthe international financial market.

why a firm might choose indirect financing ?

Firms opt for indirect financing because it might want to avoid the due diligence process that are being taken care by intermediary banks involved during the loan procedure . Therefore, it proves to be a quicker way raise money for business plans and workflow.

If a saver wants to raise funds quickly without going through all the paperwork , indirect financing can be chosen .

But, if time is not the constraint and and the due diligence process can be taken taken care of the saver , then direct financing suits better as it gives flexibility to diversify and choose accordingly , the intermediary commission is also saved.