What Does a Finance Company Do?

What Does a Finance Company Do?

Finance companies provide loans to both businesses and individuals for profit. Their revenue sources come in the form of fees and interest rates.

Consumer finance companies, commonly referred to as direct-loan or payday loan providers, provide short-term loans for people in need of money. A typical scenario might involve someone needing $200 until his next paycheck arrives. These short-term loans provide much-needed relief.


Finance companies provide loans to clients with poor credit histories who are unable to secure bank loans through offering collateral such as valuable personal assets as security for their loan. For instance, if Bob borrowed $8,000 to start his cleaning business and pledge his pickup truck as security against his loan repayment obligation.

Some large companies also own and manage their own finance companies, known as captive finance companies. Ford Motor Company operates its own automotive financing arm known as Ford Credit.

These finance companies typically process loan applications faster than banks and require only basic personal and financial data to make decisions quickly, thus limiting how often credit enquiries appear on an applicant’s credit report and thus improving his/her score.


Finance companies differ from banks by not accepting cash deposits as deposits but making their profit through charging clients interest on loans given out. Many finance companies provide secured loans that require the borrower to pledge valuable personal property as collateral against their loan agreement. Alternatively, if the client fails to repay his or her loan on time, the finance company could repossess assets as security for repayment of that loan. For example, Stefano may get a loan from one such finance company in order to cover his cleaning business startup costs, using his vehicle as collateral against it. Finance companies will typically charge higher annual percentage rates (APR) on acceptance loans than they would for standard auto loans. Some finance companies even offer factoring services specifically designed to assist these businesses.

Credit History

Credit history is a record of your financial behavior that’s maintained by consumer credit agencies. It includes information such as payment history, debt owed and available revolving credit used. A lender can use this data to assess your creditworthiness and decide whether or not they wish to lend you money.

Lenders typically prefer lending money to those with impeccable payment histories and limited debt burden. As a general rule, lenders will offer lower interest rates to borrowers with an excellent credit history.

Lenders look at an individual’s credit report to ascertain what kind of business they own or run, which can influence both how much a loan or lease costs as well as the type of trade accounts available to them.


When selling its goods or services to customers, companies generate invoices as proof. Unfortunately, receiving payment may take 30, 60 or even 90 days; which can pose problems when companies require cash quickly.

Factoring can help companies convert unpaid accounts receivable into cash quickly and cost-effectively, by selling invoices at a discount to third parties at an agreed upon discount, effectively transferring their credit risk.

Factoring companies conduct extensive analyses on invoices and their buyers to assess the likelihood that debts will be settled, which influences fees charged; higher fees may apply if clients are considered high risk. Collection should be handled professionally or else risk damaging customer relations.

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