Direct finance

Direct finance is a method of financing where borrowers borrow funds directly from the financial market without using a third party service, such as a financial intermediary. This 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. Direct financing is usually done by borrowers that sell securities and/or shares to raise money and circumvent the high interest rate of financial intermediary (banks).[1] We may regard transactions as direct finance, even when a financial intermediary is included, in case no asset transformation has taken place. An example is a household which buys a newly issued government bond through the services of a broker, when the bond is sold by the broker in its original state. [2] Another good example for direct finance is a business which directly buys newly issued commercial papers from another business entity[3]

The flow of funds from lender to borrower

See also

References
  1. Mishkin, Frederic. The Economics of Money, Banking and Financial Markets(Global, Tenth Edition). Pearson Education Limited. p. 68. ISBN 978-0273765738.
  2. https://www2.econ.iastate.edu/classes/econ353/tesfatsion/mish2b.htm
  3. https://www2.econ.iastate.edu/classes/econ353/tesfatsion/mish2b.htm


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