How Indirect Financing Works

All financial systems are composed of two basic components and that is lenders and borrowers. Often times one can be both a lender and the borrower as the purchase of stock makes one in essence a lender and also when one engages in the best forex trading.
The securities market is where financial instruments can be bought and sold by investors. Often times the need to raise large amounts of capital cannot be done solely by direct financing. That's the need for indirect financing. There are some problems with direct financing. For one thing very few consumers can transact in these markets and another problem is that a lender will want direct claims precisely with the characteristics that make the security more marketable.
For example a student needs the proceeds from the student loan to pay for his tuition and books at the beginning of the spring semester. Therefore he probably would not want to invest its funds in a 30 year corporate bond because it has longer maturity than he needs. On the other hand the corporate bond market is much more risky and the student may not want to risk having the price of bonds go down thereby jeopardizing his ability to pay his tuition nor would he want to take on risk acting on forex trading tips. In this scenario, direct lending does not suit this borrower because he cannot get the terms that facilitates a workable maturity horizon. To put it simply, he needs a more flexible manner to which to pay back the principal.
In this case indirect financing would be the best method. Investors could invest their money with financial intermediaries such as a commercial bank, credit union, life insurance company or pension fund and these intermediaries could loan the money to the student. The student could apply for the loan and set the terms for the loan and the intermediary could approve or deny it depending on the risk evaluation. This is known as indirect financing because there is an institution between the borrower and lender.