The Main Sources & Uses of Funds for Finance Companies

• Finance companies are private sector businesses that provide funding outside of traditional bank loans. Finance companies tend to focus on businesses and individuals that may not have enough financial history to qualify for bank loans, filling a niche market in lending market. Government regulations are generally more lax for finance companies, allowing them to create their own guidelines for lending and establish operating standards different than banks. Finance companies have two main sources for lending funds: traditional bank loans and private investors.
  
  

Traditional Bank Loans

• Finance companies usually have better relationships with banks and credit unions, allowing them to easily obtain large amounts of bank loans or credit lines for their lending operations. Loans and credit lines obtained by finance companies carry low interest rates and favorable terms, allowing the loans to be used for lending. In order to maintain a good credit standing with banks, finance companies may have to keep some loan proceeds on hand at all times, ensuring that loan repayments can be made by the finance company. Finance companies may also need to release financial performance information to their banks and creditors, showing that they have adequate business operations to continue lending funds to reliable customers.
  
  

Private Investors

• Outside of bank loans, finance companies may use funds from private investors to finance loans made to businesses and individuals. These types of finance companies are known as private equity groups; an example of private equity lending is the Blackstone Group, a publicly held private lending firm. Blackstone looks for private investors willing to pool their money as an investment group, who then lends this money to potential successful businesses.
  
  Private investors are usually more willing to invest their funds through a finance company since the finance company will only present the most profitable lending opportunities to the investors.
  
  

Lending Portfolio

• Finance companies must carefully manage their lending portfolio to ensure they remain profitable during their operations. Lending portfolios usually contain a mix of business and individual loans, including small business start-up funding, capital improvement funding, and personal loans like vehicle or mortgages. The size of the finance company will dictate the percentages for each loan type offered through the company. In order to mitigate market risks, finance companies maintain strict adherence to their lending guidelines for types of loans.