financial intermediary, often affiliated with a holding company or a manufacturer, that makes loans to individuals or businesses. As a group, finance companies service several distinct segments of the financial services market. Captive finance companies owned by manufacturers finance their dealers' inventory and provide direct financing, sometimes at below-market rates, to consumers buying the manufacturer's goods. Sales finance companies purchase, at a discount, the installment sales contracts of retail merchants. Commercial finance companies, also known as commercial credit companies, make loans to wholesalers and manufacturers, secured by the assets of the business ( asset-based lending), and engage in lease financing. Credit receivables of finance companies are the basis of many asset-backed securities that are traded in the capital markets as ordinary bonds and notes. Some diversified finance companies, such as General Electric Capital, are among the largest financial intermediaries and are involved in all phases of credit, from consumer and equipment financing to aircraft leasing.
Finance companies raise most of the funds needed for lending from sale of commercial paper and short-term debt in the capital markets.
company engaged in making loans to individuals or businesses. Unlike a bank, it does not receive deposits but rather obtains its financing from banks, institutions, and other money market sources. Generally, finance companies fall into three categories: (1) consumer finance companies; (2) sales finance companies; and (3) commercial finance companies.
company engaged in making loans to individuals or businesses. Unlike a bank, it does not receive deposits but rather obtains its financing from banks, institutions, and other money market sources. Generally, finance companies fall into three categories: (1) consumer finance companies, also known as small loan or direct loan companies, lend money to individuals under the small loan laws of the individual U.S. states; (2) sales finance companies, also called acceptance companies, purchase retail and wholesale paper from automobile and other consumer and capital goods dealers; (3) commercial finance companies, also called commercial credit companies, make loans to manufacturers and wholesalers; these loans are secured by accounts receivable, inventories, and equipment. Finance companies typically enjoy high credit ratings and are thus able to borrow at the lowest market rates, enabling them to make loans at rates not much higher than banks. Even though their customers usually do not qualify for bank credit, these companies have experienced a low rate of default. 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.
