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Operation of the finance Companies.
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The finance company is an entity that lends money to individuals and businesses. The revenue sources of finance organizations are the fees they charge while processing loans and the annual percentage rate (APR) they charge on loans given. According to Nasdaq, the primary function of finance companies is to make loans to individuals; they don't receive deposits as banks do.
Finance companies borrow money from sources such as the Federal Reserve System and commercial banks at a low interest rate and lend it at a higher interest rate. This is the reason the interest rates charged by finance companies are higher than the interest rates charged by banks. Companies and individuals turn to finance companies when they don't qualify for bank loans. The functions of finance companies are to offer both unsecured and secured loans to individuals and companies.
Offer Unsecured Loans
A personal loan is a loan to meet a borrower's immediate financial needs. A borrower can take a personal loan from a financial company to meet expenses such as for a house renovation, wedding, medical emergency or vacation. Personal loans are unsecured loans when they are obtained without the borrower offering any collateral.
People often approach banks when they need personal loans. However, banks extend personal loans only to people who have good credit history and meet the loan eligibility criteria. Finance companies offer personal loans at a higher interest rate to people with poor credit history.
Offer Secured Loans
According to Corporate Finance Institute, collateral is an asset that the borrower offers to the lender to secure a loan. If the loan isn't repaid, the collateral becomes the property of the lender.
An auto loan is a secured loan because the vehicle serves as collateral for the loan. If the borrower doesn't repay the loan, the lender takes possession of the vehicle. Finance companies prefer to offer secured loans to people because they present much lower risks than unsecured personal loans. If the borrower doesn't repay the money as per the agreed terms, the finance company can seize the collateral and auction it on an open market.
Finance companies look at credit history while offering secured loans too. The rate of interest or annual percentage rate (APR) might rise if the credit history of the borrower is poor when taking out an auto loan, even if the loan includes collateral.
Offer Business Loans
Finance companies extend loans to businesses as well. For example, a company can approach a finance company when it wants to lease or purchase office equipment such as computers or machinery. Most finance companies also offer factoring services to businesses.
Factoring is a financial transaction wherein the organization sells its accounts receivables to a third party at a discount to meet its immediate cash needs. For example, a manufacturing firm can sell its accounts receivables worth $100,000 to a finance organization at a discount of 10 percent. In this case, the manufacturer receives $90,000 from the finance company for immediate working capital needs.
Lend to Purchase Products
Sales-based finance companies extend loans to customers of a few retailers. For example, borrowers can take a loan from a sales-based finance company to purchase a refrigerator from a home appliance company. General Motors Acceptance Corporation (GMAC), which lends money to customers of General Motors who purchase vehicles, is an example of sales-based finance companies.
Finance companies, like banks, come up with equitable monthly installment (EMI) plans. Customers are encouraged to select a suitable EMI plan based on monthly earnings and available disposable income after accommodating the mandatory monthly expenses. Finance companies are an integral part of the money-lending industry, catering to the needs of borrowers with damaged credit history.
Unpaid debt costs the consumer and the lending company.
When a business or consumer does not pay a bill, this impacts a company's revenues and therefore, its profits. Unpaid debt can lead to hardships in covering operating expenses. These losses in income can also make a business adopt tighter credit policies, raise interest rates and, in some cases, increase prices.
Debt refers to one party owing another money. In terms of lending, there is commercial and consumer debt. Commercial debt is when one business lends money to another. Consumer debt is when a business lends money to an individual.
Default and Debt Recovery
When a business or consumer does not repay the money they owe, they are said to be in default. If the lender or creditor cannot get the debtor to accept and adhere to a repayment plan, they may pursue harder recovery measures. These may involve in-house collections, outside collection agencies and legal action.
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B.Are available only to high net-worth individual
Common financial business objectives include increasing revenue, increasing profit margins, retrenching in times of hardship and earning a return on investment.
The following are examples of financial objectives:
•Growth in revenues.
•Growth in earnings.
•Wider profit margins.
•Bigger cash flows.
•Higher returns on invested capital.
•Attractive economic value added (EVA) performance.
•Attractive and sustainable increases in market value added (MVA)
•A more diversified revenue base.
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