Advantages and Disadvantages of Financial Institutions - QS Study
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Advantages and Disadvantages of Financial Institutions

The Advantages of raising funds through financial institutions are as follows:

(i) Financial institutions provide long-term finance, which are not provided by commercial banks;

(ii) Besides providing funds, many of these institutions provide financial, managerial and technical advice and consultancy to business firms;

(iii) Obtaining loan from financial institutions increases the goodwill of the borrowing company in the capital market. Consequently, such a company can raise funds easily from other sources as well;

(iv) As repayment of loan can be made in easy installments, it does not prove to be much of a burden on the business;

(v) The funds are made available even during periods of depression, when other sources of finance are not available.

Disadvantages

The major Disadvantages of raising funds from financial institutions are as given below:

(i) Financial institutions follow rigid criteria for grant of loans. Too many formalities make the procedure time consuming and expensive;

(ii) Certain restrictions such as restriction on dividend payment are imposed on the powers of the borrowing company by the financial institutions;

(iii) Financial institutions may have their nominees on the Board of Directors of the borrowing company thereby restricting the powers of the company.

(iv) Many deserving concerns may fail to get assistance for want of security and other conditions laid down by these institutions.