What is direct finance?
This is when somebody borrows money directly from the financial markets, instead of using an intermediary or third-party service. This is usually done to avoid high borrowing costs of indirect finance, where interest rates can raise the overall cost of loans.
Key takeaways
Direct finance occurs when borrowers obtain money directly from financial markets instead of using intermediaries or third-party services like traditional banks.
The primary purpose of direct finance is to avoid high interest rates associated with indirect lending, where intermediaries borrow at one rate then lend at higher rates.
Borrowers can access direct finance by selling securities or shares to raise funds, such as when purchasing government-issued bonds in their original form.
Where have you heard about direct finance?
You may have come across this concept if you have ever bought a government-issued bond in its original form, even if you used a broker, as the price wouldn't have been increased by the associated interest rates.
What you need to know about direct finance.
Most borrowers who use direct finance will usually do so to avoid the high interest rates associated with indirect lending, for example, borrowing money from a bank. One way of doing this is by selling securities or shares to raise funds. This is to avoid a situation where a lender borrows money at a certain rate of interest, before loaning it to a borrower at a higher rate.