Legal Definitions - finance company

A finance company is a business that provides loans or credit, but it operates differently from a traditional bank. Instead of taking deposits, a finance company typically obtains its funds from other sources, such as borrowing from banks or issuing bonds. These companies either lend money directly to borrowers or purchase existing loan agreements (often called "notes" or "installment paper") from other businesses that originally made the loans.

• Example 1 (Direct Lending): Imagine "QuickLoan Solutions," a company that offers personal loans to individuals for various needs, such as home repairs or unexpected medical bills. QuickLoan Solutions doesn't accept deposits like a bank; instead, it uses its own capital to provide these loans directly to consumers. This makes QuickLoan Solutions a finance company because it's a non-bank entity directly providing credit.

• Example 2 (Purchasing Notes): Consider "Asset Funding Group," a company that specializes in buying loan portfolios. A small regional credit union might originate many car loans but then sell a portion of these loan contracts to Asset Funding Group to free up capital for new lending. Asset Funding Group then collects payments from the car buyers. Here, Asset Funding Group acts as a finance company by purchasing existing loan agreements rather than originating them directly.

Finance companies often specialize in different types of lending, leading to specific categories:

• Commercial Finance Company: This type of finance company focuses on providing loans specifically to businesses, such as manufacturers, wholesalers, or service providers. These loans are typically used for business operations, equipment purchases, inventory financing, or working capital.

  • Example: "BizGrowth Capital" provides a substantial loan to a textile manufacturer to purchase new, automated weaving machinery for their factory. This loan helps the manufacturer increase production capacity. BizGrowth Capital is a commercial finance company because it lends directly to a business for its operational needs.

  • Example: A wholesale food distributor needs funds to purchase a large seasonal inventory of produce before the peak holiday season. "SupplyChain Finance Solutions" offers them a short-term loan to cover these inventory costs. This illustrates a commercial finance company providing working capital to a wholesaler.

• Consumer Finance Company: This category of finance company deals directly with individual consumers, offering various forms of credit, often for personal use. These are sometimes referred to as "small-loan companies" because they might specialize in smaller, unsecured loans.

  • Example: "Personal Budget Loans" offers a $3,000 unsecured loan to an individual who needs to cover an unexpected car repair bill. The individual applies directly to Personal Budget Loans and receives the funds from them. This is a consumer finance company because it extends credit directly to an individual for personal expenses.

  • Example: A recent college graduate needs a small loan to cover the security deposit and first month's rent for their new apartment. "FreshStart Lending" provides this loan directly to the graduate. FreshStart Lending is a consumer finance company, assisting individuals with personal credit needs.

• Sales Finance Company: Unlike consumer finance companies, a sales finance company does not typically lend money directly to consumers. Instead, it purchases the installment contracts (payment plans) that arise when consumers buy durable goods (like cars, appliances, or furniture) "on time" from a retail seller. The retailer makes the initial sale and sets up the payment plan, then sells that payment agreement to the sales finance company.

  • Example: A customer buys a new refrigerator from "Appliance World" on an installment plan, agreeing to make monthly payments over two years. Appliance World then sells this customer's payment contract to "HomeGoods Finance," which will now collect the monthly payments from the customer. HomeGoods Finance is a sales finance company because it purchased the consumer's installment paper from the retailer.

  • Example: When a customer purchases a new car from "DriveAway Motors" and opts for a monthly payment plan, DriveAway Motors might immediately sell that customer's financing agreement to "AutoCredit Partners." AutoCredit Partners then becomes responsible for collecting the payments. AutoCredit Partners functions as a sales finance company by acquiring the installment contract from the car dealership.