What Are the Primary Functions of Finance Companies?

A finance company seeks simply to finance the activities of other businesses and individuals. This means that the company is in charge of lending money to those interested in pursuing such funding. Finance companies focus solely on this lending aspect and do not accept deposits the way that banks do. This allows finance companies to respond more quickly to changes in interest rates, so they are often able to offer slightly better deals on the money they lend out.

One of the most common functions for finance companies is the distribution of personal or individual loans. These are loans to individuals not affiliated with any business, and designated for personal uses. The most common type of individual loan is the home loan or mortgage, but smaller loans, such as auto loans, are also popular.

Business or commercial loans are granted to businesses for use in an enterprise. There are many types of business loans, and finance companies may handle any of them. Some businesses may want money to buy assets like property or equipment, while others want a loan for their first major supply purchase, or a bond payout they cannot currently afford. Business loans are often larger than individual loans and make the finance company more money on interest.

Since finance companies do not receive their money from deposits the way that banks do, they need another way to come up with the money that they loan out. One of the main functions of a finance company is borrowing these funds from banks themselves, or acquiring the funds from money market activities.

Capital financing is a special type of financing that is conducted by finance companies owned by parent companies that sell products or services. These finance companies work with the customers of the parent company, loaning them money so that they can purchase parent company goods. The parent company benefits from the decrease in inventory and the interest that the loan will generate.