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    History of Finance Company

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    m.bqair
    Finance companies originated in the early 1800s by offering installment credit to retail customers. They grew with the rise of automobile companies in the early 1900s by providing car loans, as banks did not view cars as productive assets. Finance companies provide short- and intermediate-term credit to consumers and small businesses, specializing in this service. They obtain funds from bank loans, commercial paper, deposits, bonds, and capital, and use these funds to offer consumer loans, business loans and leasing, and real estate loans. As with other lenders, finance companies face liquidity, credit, interest rate, and other risks.

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    History of Finance Company

    Uploaded by

    m.bqair
    357 views4 pages
    Finance companies originated in the early 1800s by offering installment credit to retail customers. They grew with the rise of automobile companies in the early 1900s by providing car loans, as banks did not view cars as productive assets. Finance companies provide short- and intermediate-term credit to consumers and small businesses, specializing in this service. They obtain funds from bank loans, commercial paper, deposits, bonds, and capital, and use these funds to offer consumer loans, business loans and leasing, and real estate loans. As with other lenders, finance companies face liquidity, credit, interest rate, and other risks.

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    Finance companies originated in the early 1800s by offering installment credit to retail customers. They grew with the rise of automobile companies in the early 1900s by providing car loans, as banks did not view cars as productive assets. Finance companies provide short- and intermediate-term credit to consumers and small businesses, specializing in this service. They obtain funds from bank loans, commercial paper, deposits, bonds, and capital, and use these funds to offer consumer loans, business loans and leasing, and real estate loans. As with other lenders, finance companies face liquidity, credit, interest rate, and other risks.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    357 views4 pages

    History of Finance Company

    Uploaded by

    m.bqair
    Finance companies originated in the early 1800s by offering installment credit to retail customers. They grew with the rise of automobile companies in the early 1900s by providing car loans, as banks did not view cars as productive assets. Finance companies provide short- and intermediate-term credit to consumers and small businesses, specializing in this service. They obtain funds from bank loans, commercial paper, deposits, bonds, and capital, and use these funds to offer consumer loans, business loans and leasing, and real estate loans. As with other lenders, finance companies face liquidity, credit, interest rate, and other risks.

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    History of Finance company

    The earliest examples of finance companies date back to the beginning of the 1800s when
    retailers offered installment credit to customers. With an installment credit agreement, a loan is
    made that requires the borrower to make a series of equal payments over some fixed length of
    time.

    Finance companies came into their own when automobile companies began mass marketing. In
    the early 1900s, banks did not offer car loans because cars were considered consumer purchases
    rather than productive assets. Many people wanted to buy cars but found it difficult to raise the
    purchase price. The automobile companies established subsidiaries, called finance companies, to
    provide installment loans to car buyers.

    What is finance company

    Finance companies provide short- and intermediate-term credit to consumers and small
    businesses. Although other financial institutions provide this service, only finance companies
    specialize in it.

    Source of finance company

    The main sources of funds for finance companies are:

     Loans from banks


     Commercial paper
     Deposits
     Bonds
     Capital

    Loans from Banks


    Finance companies commonly borrow from commercial banks and can consistently renew the
    loans over time. For this reason, bank loans can provide a continual source of funds, although
    some finance companies use bank loans mainly to accommodate seasonal swings in their
    business.

    Commercial Paper
    Although commercial paper is available only for short-term financing, finance companies can
    continually roll over their issues to create a permanent source of funds

    Deposits
    Under certain conditions, some states allow finance companies to attract funds by offering
    customer deposits similar to those of the depository institutions
    Bonds
    Finance companies in need of long-term funds can issue bonds. The decision to issue bonds
    versus some alternative short-term financing depends on the company’s balance sheet structure
    and its expectations about future interest rates.

    Capital
    Finance companies can build their capital base by retaining earnings or by issuing stock. Like
    other financial institutions, finance companies maintain a low level of capital as a percentage of
    total assets

    Uses of finance company

    Finance companies use funds for:

     Consumer loans
     Business loans and leasing
     Real estate loans

    Consumer loans
    Finance companies extend consumer loans in the form of personal loans.

    Business Loans and Leasing


    In addition to consumer loans, finance companies also provide business (commercial) loans.
    Companies commonly obtain these loans from the time they purchase raw materials until cash is
    generated from sales of the finished goods.

    Another way finance companies provide financing is by leasing. They purchase machinery or
    equipment and then lease it to businesses that prefer to avoid the additional debt on their balance
    sheet that purchases would require.

    Real Estate Loans


    Finance companies offer real estate loans in the form of mortgages on commercial real estate and
    second mortgages on residential real estate. The offering of second mortgages has become
    increasingly popular over time.

    Baqiralisiddique@gmail.com

    EXPOSURE OF FINANCE COMPANIES TO RISK


    Liquidity risk

    Refers to problems that arise when a firm runs short of cash. For example, a bank may have a
    liquidity problem if many depositors withdraw their funds at once. Finance companies run the
    risk of liquidity problems because their assets, consumer and business loans, are not easily sold
    in the secondary financial markets. Thus, if they are in need of cash, they must borrow. This is
    not difficult for larger finance companies because they have access to the money markets and
    can sell commercial paper, but borrowing may be more difficult for smaller firms.

    Credit or default risk


    The greatest is default risk, the chance that customers will fail to repay their loans. As mentioned
    earlier, many consumer finance companies lend to borrowers who are unable to obtain credit
    from other sources. Naturally, these borrowers tend to default more frequently. Finance company
    delinquency rates are usually higher than those for banks or thrifts.

    Interest Rate Risk


    Both liability and asset maturities of finance companies are short or intermediate term.
    Therefore, they are not as susceptible to increasing interest rates as are savings institutions.
    Finance companies can still be adversely affected, however, because their assets are typically not
    as rate sensitive as their liabilities. They can shorten their average asset life or make greater use
    of adjustable rates if they wish to reduce their interest rate risk.

    Types of finance company


    Consumer Finance Companies

    Consumer finance companies make loans to consumers to buy particular items such as furniture
    or home appliances, to make home improvements, or to help refinance small debts. Consumer
    finance companies are separate corporations (like Household Finance Corporation) or are owned
    by banks (Citicorp owns Person-to-Person Finance Company, which operates offices
    nationwide).

    Typically, these companies make loans to consumers who cannot obtain credit from other
    sources due to low income or poor credit history. Finance companies will often accept items for
    security, such as old cars or old mobile homes, that would be unacceptable to banks. Because
    these loans are often high in both risk and maintenance, they usually carry high interest rates.

    Sale finance companies


    A sales finance company, also called a captive finance company, is owned by the manufacturer
    to make loans to consumers to help finance the purchase of the manufacturer’s products.

    Business Finance Companies


    Business finance companies offer loans to small businesses. For example, they may provide
    loans to finance inventory. The business uses the loan to purchase materials that are used in the
    production process. Once the products are manufactured and sold, the business uses the revenue
    to pay off the loan.

    Balance sheet of finance companies

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