Finance is the study of how money is managed and the actual process of acquiring needed funds. Both channel funds from saver-lenders to who borrows money. Direct Finance takes place between an ultimate lender and an ultimate borrower, with no intermediary involved in it.
It takes place between lenders and borrowers with financial intermediaries involved ie; one between lenders and financial intermediaries, and another between financial intermediaries and borrowers. Financial intermediaries are the financial institutions through which savers can indirectly provide funds to borrowers. An agent who buys and sells securities from inventory is called a dealer. Direct Finance is riskier as compared to it.
What is indirect lending?
It is a method of financing where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary. It is different from direct financing where there is a direct connection to the financial markets as indicated by the borrower issuing securities directly on the market. It is more important to borrowers than direct finance.
What is an investment bank in simple terms?
Investment banks are the type of financial institutions other than commercial banks that helps to raise funds for various companies including insurance companies by issuing IPO(Initial Public Offering)of stocks or bonds, mutual funds. There are also other finance companies that are not-for-profit organizations like credit unions which are run and controlled by its members. For making the capital market function efficiently, asset transformation is done.
Difference between Direct and Indirect Finance
|1.||Direct financing occurs when where borrowers borrow funds directly from the financial market without using a third-party service, such as a financial intermediary.||Indirect finance is a method of financing where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary.|
|2.||Direct Finance is different from indirect financing where a financial intermediary takes the money from the lender with an interest rate and lends it to a borrower with a higher interest rate.||It is different from direct financing where there is a direct connection to the financial markets as indicated by the borrower issuing securities directly on the market. Indirect finance can be done in stock exchange market.|
|3.||Direct finance is less important to borrowers as compared to indirect finance.||It is more important to borrowers than direct finance.|
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