Recent changes in the character of the finance company industry.

The structure of the finance industry has changed markedly in recent years. As in the case of credit union, savings and loans, and savings banks, the number f finance companies have been trending downward, although the average size of such companies has grown considerably. A survey by the Federal Reserve board revealed that in 1960 there were more than 6,400 finance companies operating in the United States, but by 1980 only about 2,000 independent companies could be found. A modest rise in the number of new firms occurred during the 1970s, however, as bank holding companies centered around some of the nation‘s largest banks organized new finance company subsidiaries.
this long-term downtrend in the industry‘s population reflects a number of powerful economic forces at work. Rising cost pressures, the broadening of markets, the need to innovate, and intensified competition from other financial institutions have encouraged finance companies to strive for lager size and greater efficiency. Many smaller companies have sold out to larger conglomerates as high interest rates squeezed earnings. Despite their declining numbers, however, finance companies rank among the fastest-growing financial intermediaries in the United States and continue to be a potent force in the markets for business and consumer credit.

Different Finance Companies for Different Purposes(3)

Commercial finance companies, as their name implies, focus principally on extending credit to business firms. Most of these companies provide "account receivable financing" or "factoring" services to small or medium-sized manufacturers and wholesalers. with accounts receivable financing, the commercial finance company may extent credit against the borrower‘s receivables in the form of a direct cash loan. Alternatively, a factoring arrangement may be used in which the finance company acquires the borrowing firm‘s credit accounts at an appropriate discount rate to cover the risk of loss. most commercial finance companies today do not confine their credit-granting activities to the financing of receivables but also make loans secured by business inventories, machinery, and other fixed assets. In addition, they offer lease financing for the purchase of capital equipment and rolling stock (such as airplanes and railroad cars) and make short-term unsecured cash loans.
We should not over-dramatize the differences between these three types of finance companies. The larger companies are active in all three areas. In addition, most finance companies today are extremely diversified in their credit-granting activities, offering a wide range of installment and working-capital loans, leasing plans, and long-term credit to support capital investment..

Different Finance Companies for Different Purposes(2)

Sales finance companies make indirect loans to consumers by purchasing installment paper from dealers selling automobiles and other durables. Many of these firms are "captive" finance companies controlled by a dealer or manufacturer. their principal function is to promote sales of the sponsoring firm‘s goods and services providing by credit. Companies having finance affiliates include General Electric, Motorola, Sears, wards, and International Harvester. Generally, sales, finance companies will specify in advance to retail dealers the terms (i.e., maturities, minimum down payments, and finance charges) of installment contracts they are willing to accept. Frequently they will give the retail dealers a supply of contract forms which the dealers will fill out when the sale is made. The contract is then sold immediately to the finance company.

Different Finance Companies for Different Purposes(1)

also finance companies, also known as small-loan companies, make personal cash loans available to many customers. the majority of their loans support the purchase of passenger cars, home appliances,recreation vehicles, and mobile homes. however, a growing proportion of consumer finance company loans center on aiding customers with medical and hospital expenses, educational costs, vacations, home repair and maintenance, and energy bills. Loans made by small-loan companies are considered to be more risky than other consumer installment loans and therefore generally carry steeper finance charges than those assessed by banks, credit unions, savings and loan associations, and other installment lenders.

Methods of Industry Financing

Finance companies are heavy users of debt in financing their operations. Principal sources of borrowed funds include bank loans, commercial paper, and long-term debentures sold primarily to banks, insurance companies, and non-financial corporations. Which source of funds these companies emphasize most heavily at any given time depends essentially on the structure of interest rate. When long-term rates are high, these companies tend to emphasize commercial paper and shorter-term bank loans as sources of funds. On the other hand, in years when long-term rates are relatively low, usually during a business recession, long-term debt will be drawn upon more heavily

Finance Companies

Finance Companies are sometimes called "department stores of consumer and business credit. these institution grant credit to businesses and consumers for a wide variety of purposes, including the purchase of inventories, business equipment, automobiles, home repairs, vacations, medical care, mobile homes, and home appliances. Most authorities divide firms in the industry into one of three groups-consumers finance companies, sales finance companies, and commercial finance companies.