Explain what is the primary function of finance companies? Provide an example.
What is the function of institutional venture capital firms?
Case Study 2.1
What is the primary function of finance companies? How do finance companies differ from depository institutions?
What are the three major types of finance companies? To which market segments do each of these types of companies provide service?
What have been the major changes in the accounts receivable balances of finance companies over the 38-year period from 1977 to 2015?
What are the major types of consumer loans? Why are the rates charged by consumer finance companies typically higher than those charged by commercial banks?
Why have home equity loans become popular? What are securitized mortgage assets?
What advantages do finance companies have over commercial banks in offering services to small business customers? What are the major subcategories of business loans? Which category is the largest?
What have been the primary sources of financing for finance companies?
Sample Answer
Example of a Finance Company
One example of a finance company is a car loan company. Car loan companies provide loans to consumers to purchase vehicles. They typically require a down payment and offer loan terms ranging from 24 to 84 months. Car loan companies typically charge higher interest rates than banks, but they are more willing to lend to borrowers with lower credit scores or who need specialized financing, such as a loan for a used car.
Function of Institutional Venture Capital Firms
Institutional venture capital firms are investment firms that invest in early-stage companies with high growth potential. Venture capital firms typically raise money from institutional investors, such as pension funds and endowments. They then use this money to invest in companies that are developing new products or services or that are expanding into new markets.
Venture capital firms play an important role in the economy by helping to finance the development of new businesses. They also provide valuable mentorship and guidance to the entrepreneurs they invest in.
Case Study 2.1
What is the primary function of finance companies? How do finance companies differ from depository institutions?
The primary function of finance companies is to provide loans to individuals and businesses. Finance companies do not accept deposits, but borrow money at wholesale rates to finance their loans. Depository institutions, such as banks, accept deposits from the public and use those deposits to make loans.
What are the three major types of finance companies? To which market segments do each of these types of companies provide service?
The three major types of finance companies are:
- Consumer finance companies: Consumer finance companies provide loans to individuals for a variety of purposes, such as purchasing a car or home, paying for college, or consolidating debt.
- Business finance companies: Business finance companies provide loans to businesses for a variety of purposes, such as starting a new business, expanding an existing business, or purchasing equipment.
- Mortgage finance companies: Mortgage finance companies provide loans to individuals to purchase homes.
What have been the major changes in the accounts receivable balances of finance companies over the 38-year period from 1977 to 2015?
The accounts receivable balances of finance companies have increased significantly over the 38-year period from 1977 to 2015. This increase is due to a number of factors, including the growth of the consumer economy, the increase in consumer debt, and the expansion of the finance industry.
What are the major types of consumer loans? Why are the rates charged by consumer finance companies typically higher than those charged by commercial banks?
The major types of consumer loans include:
- Auto loans: Auto loans are used to purchase a vehicle.
- Personal loans: Personal loans can be used for a variety of purposes, such as consolidating debt, paying for medical expenses, or funding a home improvement project.
- Student loans: Student loans are used to pay for college or other post-secondary education.
- Credit cards: Credit cards can be used to purchase goods and services or to withdraw cash.
Consumer finance companies typically charge higher interest rates than commercial banks because they are lending to riskier borrowers. Consumer finance companies are also more likely to lend to borrowers with lower credit scores or who have limited credit history.
Why have home equity loans become popular? What are securitized mortgage assets?
Home equity loans have become popular because they allow homeowners to borrow against the equity in their homes. Home equity loans can be used for a variety of purposes, such as consolidating debt, paying for home improvements, or funding a child's education.
Securitized mortgage assets are financial products that are backed by a pool of mortgages. Securitized mortgage assets can be sold to investors, which allows mortgage lenders to raise capital and make more loans.
What advantages do finance companies have over commercial banks in offering services to small business customers? What are the major subcategories of business loans? Which category is the largest?
Finance companies have a number of advantages over commercial banks in offering services to small business customers. Finance companies are typically more flexible and less bureaucratic than commercial banks. They are also more likely to lend to small businesses with limited credit history or collateral.
The major subcategories of business loans include:
- Commercial and industrial loans: Commercial and industrial loans are used to finance the operations and growth of businesses.
- Real estate loans: Real estate loans are used to purchase or refinance commercial real estate.
- Equipment loans: Equipment loans are used to purchase equipment for businesses.