Finance Companies
can be partnerships or corporations which are organized to extend credit lines to customers and to industrial, commercial or agricultural companies by:
-discounting and factoring commercial papers and account receivables -buying or selling contracts, bases, chattel mortgages and other evidences of indebtedness -lending motor vehicles, heavy equipment, office machines and appliances.
Finance companies in general tend to be interest rate-sensitive - increases and decreases in market interest rates affect their profits directly. For this reason, publicly held finance companies are sometimes referred to as money stocks.
Finance
companies
also
grant
small
loans
directly
to
consumers at a relatively high rate of interest. They typically enjoy high credit ratings and are thus able to
Until then, the need for consumer loans had been met
primarily by illegal loan shark activities because it was unprofitable for banks to make small loans at rates below
Large-sales
finance
companies,
which
operate
by
purchasing unpaid customer accounts at a discount from merchants and collecting payments due from consumers,
companies
-make small loans against personal assets and provide an option for individuals with poor credit ratings.
Larger commercial finance companies often offer small business owners a variety of lending options from which to choose. These include:
factoring (buying a firms accounts receivables) working capital loans equipment financing and leasing specialized equity investments collateral-based financing cash-flow financing Some also offer additional services in connection with those loans, such as assistance with collections.
BANK AFFILIATED
This finance company frequently can provide very competitive interest rates.
INDEPENDENT
An independent finance company has the
greatest flexibility, will finance almost any
BROKERS
This is generally considered the most
CAPTIVE
These are owned by the equipment suppliers and can provide very low rates because of their familiarity with the
product.
Finance Companies
Finance companies are non-depository lending institutions. Some finance companies are independent corporations. services holding companies or of manufacturers. Because they do not issue deposits (else they would be considered banks), finance companies have the following Other
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DISADVANTAGEs
Their liabilities do not have government (FDIC) insurance. Since
deposit insurance is usually provided at subsidized rates, this implies that finance companies likely have a higher cost of funding. liabilities. Finance companies pay competitive rates on their
Often, finance companies provide installment loans, which were viewed by society as immoral. Installment credit was
ADVANTAGES
Because their liabilities are not government insured, they are subject to less government regulation than banks. In particular, they may be able to lend to riskier borrowers that
In recent years, finance companies were the major issuers of commercial paper. Because finance companies do not issue deposits, they cannot provide the transactions services (e.g., checking accounts) offered by banks. Since finance companies lack a branch office network, they typically make loans to borrowers located farther
away.
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Empirical evidence in Carey, Post, and Sharpe (1998) Journal of Finance also supports differences in lending due to reputational concerns and regulation differences. They find: Relative to banks, a greater proportion of finance companies loans are to higher-leveraged corporations. Finance company loans are, on average, longer maturity (3 vs. 2 years) and more frequently collateralized (92 vs. 70 %) compared to bank loans.
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