Chapter 22
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| What do finance companies specialize in? | specialize in providing short- and intermediate-term credit to consumers and small businesses.
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| Finance Companies in general | Have more than $1 trillion in assets. In aggregate the amt of their business is similar to that of SIs. Some are independently owned; some are subsidiaries of financial institutions or other corps. Put into different types based on specific svcs offered.
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| What are the 3 types of finance companies? | Consumer Finance Companies, Business Finance Companies, and Captive Finance Subsidiaries
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| Consumer Finance Companies | provide financing for customers of retail stores/wholesalers. Also provide personal loans directly to individuals to finance purchases of large household items. Some also provide mortgage loans.
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| Business Finance Companies | Offer loans to small businesses. ex. to finance inventory. Also provide financing in the form of credit cards that are used by a business's employees for travel or for making purchases on behalf of the business.
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| Captive Finance Subsidiaries | wholly owned subsidiary whose primary purpose it to finance sales of the parent company's products and services, provide wholesale financing to distributors of the parent company's products, and purchase receivables of the parent company.
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| What are some of the advantages of CFS? | A CFS can be used to finance the distributor/dealer inventories until a sale occurs, making production less cyclical for the manufacturer. It can serve as effective mkting tool. Also be used to finance products leased to others.
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| Sources of Funds for Finance Companies | loans from banks, commercial paper, deposits, bonds, and capital
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| Loans from banks | Finance companies commonly borrow from commercial banks and can consistently renew the loans over time. Provide a continual source of funds.
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| Commercial paper | Even though commercial paper is only available for a short time, finance companies can continually roll over their issues to create a permanent source of funds. Only the most well-known finance companies have been able to do this.
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| Bonds for finance companies | Finance companies in need of long-term funds can issue bonds. Decision depends on the company's balance sheet structure and its expectations about future int rates.
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| Capital for finance companies | Can build their captial base by retaining earnings or issuing stock. maintain a low level of capital as a percentage of total assets.
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| What are the uses of funds for finance companies? | Consumer loans, business loans and leasing, and real estate loans.
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| Consumer loans | Extend consumer loans in the form of personal loans. most pop type is an automobile loan offered by a finance company that is owned by a car manufacturer. Also offer credit card loans through a particular retailer.
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| Business loans and leasing | provide business loans to companies that need to buy raw materials until cash from sales of the finished goods. Support leverage buyouts. Act as factors for accts recievables; buy at discount & collect the debt. also lease equip to businesses
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| Real Estate loans | Offer real estate loans in the form of mortgages on commercial real estate and 2nd mortgages on residential real estate. 2nd mortgages generally have low default rate and have become very popular.
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| What are the risks faced by finance companies? | liquidity risk, interest rate risk, and credit risk
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| Liquidity Risk | Generally don't hold asets that could be easily sold in 2nd mkt. If in need of funds, must borrow. Balance Sht structure doesnt call for much liquidity. have low liquidity than others. All of their funds are from borrowings rather than deposits anyway.
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| Interest Rate Risk | Both liability and asst maturities of finance companies are short or intermediate term. Not as affected to inc int rates as SIs. Can be affected, b/c assets arent as rate sensitive as liabilities. Can shorten avg asset life/make adj rts to reduce risk.
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| Credit Risk | B/c the majority of a finance company's funds are allocated as loans to consumers and businesses, credit risk is major. Customers=moderate credit risk. Loan delinquency rate is higher than of other institutions. offset by higher avg rt charged on loans.
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| What do finance companies have in common with commercial banks, savings institutions, and credit unions? | Their concentration in consumer lending. Able to increase their mkt share when SIs experience financial problems. Some finance companies have acquired SIs. Some have insurance subsidiaries that compete w/ other insurance subsidiaries
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