Final answer:
Borrowing costs are higher with indirect financing because banks, as intermediaries, incur costs in assessing and monitoring the borrower's financial status, which they compensate for with higher interest rates.
Step-by-step explanation:
Borrowing costs tend to be higher with indirect financing versus direct financing because there are additional intermediaries, such as banks, involved in the process.
These intermediaries provide customized service, and because they take on the role of assessing and monitoring the borrower's financial situation—often with greater information access than bondholders—they incur costs that are passed on to the borrower in the form of higher interest rates.
In contrast, direct financing through bonds typically involves lower borrowing costs due to a wider pool of investors and the distribution of risk among numerous bondholders, rather than a single intermediary.