Solution:
The disadvantage of formal sources of credit is it requires collateral and proper documentation.Banks require collateral and documentation to provide loans. Every loan agreement states a rate of interest that the borrower must pay to the lender. The lender may require collateral, an asset the borrower owns that serves as a guarantee until the loan is returned. If the borrower defaults on the loan, the lender has the right to sell the collateral to recover the money owed. The interest rate, collateral and documentation requirements, and repayment are all part of the credit terms.
