Chapter 27
On the Web: Finance Companies
History of Finance Companies
Purpose of Finance Companies
Risk in Finance Companies
Types of Finance Companies
Business (Commercial) Finance Companies
Consumer Finance Companies
Sales Finance Companies
Regulation of Finance Companies
Finance Company Balance Sheet
Assets
Liabilities
Income
Finance Company Growth
◼ Overview and Teaching Tips
Finance companies are discussed as an important element in the growing economy. Finance companies
allow individuals with smaller pocketbooks to borrow money to purchase items they would not otherwise
be able to buy. They are usually called a financial intermediary because they borrow large amounts, but
lend small amounts to individuals and businesses. High-risk customers are often more accepted at finance
companies for loans offered at higher interest rates.
Finance companies are divided into three types: business, sales, and consumer. Factoring is a type of
provision of credit where the factors buy accounts receivables. Also, they provide leases and floor plan
loans. Consumer finance companies usually finance customers with bad or no credit to purchase such
items as furniture or home appliances. Point out to students that customers who go to consumer finance
companies will pay a higher interest rate because they are at higher risk of default. In-house credit and
credit card companies including Ford Motor Credit are excellent examples of sales finance companies.
Since finance companies do not have depositors, they are not regulated heavily by the government.
However, they must disclose the costs of the loan and limit the rate of the interest. When collecting
delinquent and defaulted loans, finance companies must follow state and federal government regulation.
Chapter 27: On the Web: Finance Companies 159
◼ Answers to End-of-Chapter Questions
2. Automobiles began to be mass-marketed and consumers needed loans to purchase them.
4. Consumer finance companies often charge far higher interest rates than banks.
6. Finance companies face little interest-rate risk because they tend to make short-term loans which are
not affected much by interest-rate changes.
8. The finance company making the lease will find it easier to repossess the assets if a default occurs.
The firm leasing the asset may be able to conserve cash in that no down payment may be required.
10. They are sales finance companies.
12. Finance company customers frequently file bankruptcy because they often have few assets to lose.
The bankruptcy can make collection on the loan impossible and often delays retrieval of collateral.
14. Usury statutes limit interest rates.