Question

Banking and Finance Unit Test

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In one to two sentences, explain why borrowing costs would be higher with indirect financing versus direct financing. (2 points)

Answer 1

Indirect financing, such as borrowing money from banks, leads to higher borrowing costs compared to direct financing as there are additional fees and interest rates charged by financial intermediaries.

Step-by-step explanation:

Indirect financing refers to borrowing money from financial intermediaries, such as banks, which charge higher interest rates to cover their costs and make a profit. Direct financing, on the other hand, involves borrowing money directly from lenders, such as issuing bonds or selling stock, which can result in lower borrowing costs because there is no intermediary involved.

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