Question

Let's say you're the head of finance at Gaga Enterprises, a fashion company. Your company needs $ 10 million to expand its production. What is the point of raising the money with the help of a financial institution or directly from the financial market?

Answer 1

Ans ) Here we need to understand what are financial institution are they facilitate the collection and distribution of funds. Businesses are involved in the production and distribution of goods and services and earn higher return on investment. For the strategy of expansion and diversification they need more funds to invest. Hence they are in need of money so they raise a request to financial institution , which supply the funds to these businesses and even provide tailor made products which suits the risk and return profile of the businesses. These financial institutions has robust risk analysis mechanism and they also perform the cash flow analysis as well. Hence Through Financial institutions thre would be efficient allocation of resources. The other way round is directly raising money through financial market , the benifit of this action would be reduction in the amount of commision paid to the financial institution ,but the other disadvantages are it consumes more time to allocate efficient source of fund and the risk analysis is the sole responsibility of the business. There is lack of expert advice in directly moving into financial markets for funds than the financial institutions. Altogether it is far benificial to take help from the financial institution for raising funds.