Finance is one of the most critical matters when it comes to sustenance. Any country which doesn’t have an established, stable finance market is most likely to collapse.
Firstly, Let’s have a look at what indirect Financing is, then we will go further and discuss other aspects related to it.
In this type of finance, the borrower takes capital from the finance market via indirect means. There is always an intermediate party involved.
The government provides relief by reducing tax, as a means of support rather than collecting and dispersing the collected tax revenue.
Direct financing is the method in which the borrower does not involve a middle/ third party to borrow funds. In short, there is no need for financial intermediary involvement.
In short, direct financing can be described as when a person directly takes load from the bank. On the other hand, indirect involves a third party is involved in getting that loan.
Finance intermediary plays the role of a bridge or, more so, a middle man in the method of indirect financing. An example of such an entity is a “Bank.” There are many benefits in involving a mediator for finance. Most importantly, for middle-class people.
It offers an average man liquidity and economies of scale in bank asset management.
A financial intermediary moves the funds from those who have more capital to those who need it.
How Does A Financial Intermediary Work?
We have multiple kinds of financial intermediaries to choose from. Firstly, we will discuss how a non-bank financial intermediary works.
Non-Bank Financial Intermediary
This entity doesn’t take deposits from people. Instead, they provide a variety of financial services to them. For example, leasing, insurance plan, etc. They may involve in the long term with them to provide security and growth of their funds.
A finance advisor works for the clients by providing them options for insurance, bonds, stocks, etc.
Bank Financial Intermediary
They lend support by giving funds to the people through other finance institutions and from the federal reserve.
Pros and Cons of a Financial Intermediary
- Pooling of funds, helping them to make larger investments
- Intermediaries pool your capital in a wide variety of areas. The range is pretty diverse; thus, the chances of benefits are more.
- Enables the people to spend more on their needs.
Intermediary takes money on an interest rate and passes it on to the borrower on a much higher interest applied to it, increasing the overall payment.
What Is Described As Involving Indirect Finance?
Two examples for describing indirect financing
1. A corporation takes a loan from the Bank
A registered corporation can be large or small scale taking money from the bank. They have to provide employees information and revenue generation to the bank.
2. Buying shares in mutual funds
This comes under indirect financing because of the transparency factor.