Financial intermediation & sources of company finance

Financial intermediation

The savings and investment process in capitalist economies is based around financial intermediation. A financial intermediary acts as a sort of middle-man between the financial investor and the borrower. Individuals (or other institutions) put funds into the financial intermediary which lends or invests the funds on to borrowers or companies.

In taking in funds from savers a financial intermediary issues liabilities against itself, and in supplying funds to borrowers it acquires financial claims against these borrowers which form its assets, the intermediary performs the useful role of mobilizing funds from the surplus sectors/agents and making these funds available to the deficit sectors/agents.

What other roles do financial intermediaries play in financial systems; in making financial intermediation a central institution of economic growth. The attached notes explain as well the crucial roles of financial intermediation in maturity transformation and risk reduction.

Sources of finance

As we are concerned with how companies raise capital through the agency of financial intermediaries and capital markets, it is important to understand the underlying theoretical basis of such operations.

The attached presentation "Sources of Company Finance" starts with the basis of financial transactions in terms of the creation of financial claims, and how financial transactions may be developed by financial intermediaries. It then continues with the range of sources of capital available, in order of maturity, beginning with short-term borrowing, followed by medium- and long-term borrowing, and concluding with equity capital from the stock exchange. It may be noted that demarcation based on time categories is arbitrary, largely dependent upon the subjective circumstances of borrower and lender.

Those who are interested in understanding this subject matter better may refer to Davis & Pointon, Finance and the Firm, Oxford University Press, 1990.

Sources of Company Finance.pdf