What is a finance company?

A finance company is a specialized financial institution that gives credit for the purchase of consumer products and services by purchasing merchants’ time-scale contracts or making small loans to customers. A finance company is a lender to businesses as well as individuals. Not as a bank, they never collect cash deposits from their clients and does not provide banks with certain other services such as account checking etc.

Types of finance companies

Finance companies are of 3 types. They are

  1. Business
  2. Sales
  3. Consumer

Main duties of financing companies            

Installment Loans

Some merchants such as the EMI goods selling persons etc may put a contract with the financing companies. So that they can pay as an installment when it gets from the customer.

Personal Loans

Sometimes it may take a long time to get a personal or financial loan from a bank. At that time, financial companies will help you by giving you personal as well as financial loans. But some finance companies offer a high rate for these types of loans.

Loans For your asset

Commercial finance companies provide loans to businesses based on mortgaged assets. Consumers are usually fast-growing businesses that have assets to collateralize but are short of cash. Such assets consist of acceptable accounts, inventory, and equipment. In default, the lender holds the assets.

FACTORY LOANS/ FACTORING

Factoring is a valuable variation of asset-based loans. Here, if a fast-growing small manufacturer does not have enough sell and credit to multiple users, then the accounts of the manufactures will be selling to the lender for about 80 percent of the value of the acceptable ones. Once collected the remaining funds will be available to the manufacturer and the lender fee will be lower.

Advantages of financing

  • Ownership is with you
  • Planning may be easier
  • Deduction of tax
  • Business credit score may improve.
  • Bond debt can be avoided, interest payments can be reduced and the debt /equity ratio can be improved.

Disadvantages of financing

  • The results of the asset sale may be sought first in the event of loan collateral, as well as loan agreements, certain restrictions on operations, and liquidation.
  • All aspects of the transaction can be very costly if not carefully evaluated and negotiated.
  • It reduces the return per share and lowers the control of existing shareholders.
  • Shareholder expectations for revenue are comparatively very high, and this gives them the ability to expel director’s board and the management team if their expectations of performance are not met. Also dividends may not be tax-deductible.

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