Chapter 22
Finance Company Operations
Outline
Types of Finance Companies
Consumer Finance Companies
Business Finance Companies
Captive Finance Companies
Sources and Uses of Finance Company Funds
Sources of Funds
Uses of Finance Company Funds
Interaction with Other Financial Institutions
Participation in Financial Markets
Valuation of a Finance Company
Factors That Affect Cash Flows
Factors That Affect the Required Rate of Return
Exposure of Finance Companies to Risk
Liquidity Risk
Interest Rate Risk
Credit Risk
Multinational Finance Companies
Key Concepts
1. Describe the types of finance companies.
2. Describe the finance company’s sources and uses of funds.
3. Discuss the participation of finance companies in financial markets.
POINT/COUNTER-POINT:
Will Finance Companies be Replaced by Banks?
POINT: Yes. Commercial banks specialize in loans, and can provide the services that are provided by
finance companies. The two types of financial institutions will ultimately merge into one.
COUNTER-POINT: No. Finance companies tend to target a different market for loans than commercial
banks. Thus, commercial banks will not replace finance companies because they do not serve that market.
WHO IS CORRECT? Use InfoTrac or some other source search engine to learn more about this issue and
then formulate your own opinion.
ANSWER: Finance companies tend to provide credit to borrowers that exhibit higher risk. They can
charge the borrowers a higher interest rate and therefore have the potential to earn a higher return on the
loans (if the borrowers repay the loans). Commercial banks are exposed to default risk, but not to the
same degree. Their loan portfolios are monitored by regulators. Thus, they are unlikely to replace finance
companies.