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Chapter 22
Consumer Finance
Operations
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline

Types of finance companies

Sources of finance company funds

Uses of finance company funds

Regulation of finance companies

Risks faced by finance companies
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Captive finance subsidiaries
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Valuation of a finance company
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Interaction with other financial institutions
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Participation in financial markets
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Multinational finance companies
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Types of Finance Companies

Some finance companies use bank loans mainly to
accommodate seasonal swings in their business
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Commercial paper

Only the most well-known finance companies have been able to
issue commercial paper

As secured commercial paper has become more popular, most
finance companies have access to this market

Most finance companies issue commercial paper using
commercial paper dealers

The best-known finance companies can issue commercial paper
through direct placement
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Sources of Finance Company
Funds (cont’d)

Deposits

Some states allow finance companies to offer customer deposits
similar to those of depository institutions
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Bonds

The decision to issue bonds versus some alternative short-term
financing depends on the company’s balance sheet and
expectations about future interest rates

Some finance companies offer credit card loans through a
particular retailer
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The main competition in the consumer loan market is from
commercial banks and credit unions
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Uses of Finance Company Funds
(cont’d)

Business loans and leasing

Commercial loans:

Are obtained by companies to finance the cash cycle

Are short term but may be renewed
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Are often backed by inventory or accounts receivable
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Are sometimes used to finance LBOs

Finance companies commonly act as factors for
accounts receivable

They purchase a firm’s receivables at a discount and are
responsible for processing and collecting the balances

Factoring reduces a business’s processing costs and
provides short-term financing
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