Direct Vs Indirect Finance Definition | Mode or Method of Finance

Definition of Mode of Finance:

Mode of finance is the way we finance a business.

Introduction:

Hi guys. This is Azowad Abrar. Today I am going to talk about Mode or Method of finance. I am studying Bachelor of Business Study. So, the information here will be a little bit of bookish but genuine. So let's start.

Types, Definition and Comparison

There are two modes or method of finance. One is direct finance and the other is indirect finance.

• Direct Finance: 

Direct finance is one of the two method of financing in which the borrower borrow funds from financial market without any connection of the third party institutions. We can consider it as direct financing when you buy an asset that wasn't transformed by the third party. We will know what is asset transformation shortly. 

When a person purchase a government bond from a broker who haven't transformed the bond yet, it will be a direct financing because there was no asset transformation.

• Indirect Finance: 

Indirect finance is one of the two method of financing in which the borrowers borrow money from financial market through any kind of third party intermediary. Transformed assets are considered indirect financing.
For Example: When a person purchase a commercial bond through broker issued by a company, it will be considered indirect financing only if the bond was transformed asset.

How the Insurance Company Transform Assets:

People can get/ purchase auto insurance online. For example: Mr A has purchased an insurance from Geico Insurance When he purchased the auto insurance a liability was created. The insurance company invested the money. So, he transformed the liabilitiy into an asset. Same goes for business health insurance, life insurance and any kind of insurance. The company is bound to compensate. Otherwise he can file a lawsuite through an attorney against Insurance companies if they are not willing to compensate you. 

Crypto Currencies are way too dangerous to invest for an Insurance Company and any Financial Institutions.

Asset Transformation Vs Securitization:

Asset transformation can be defined in two way. One way is turning liabilities (Deposits) into assets (Loan). Another is purchasing primary asset or securities and transforming them into different asset in terms of risk and maturity date. Second definition is for the financial institutions.

Securitization is the process of taking an illiquid asset or group of asset and transform them into secrity. For example: An institution creates several mortgage backed up by the claims against the mortgagors' asset. They transform them into securities and sell it.  Who will buy the share will get the money the mortgagor will pay. 

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