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The finance industry is among the most vital in various countries across the globe. In 2020, the global financial services industry was worth $20.4 trillion. With a compound annual growth rate (CAGR) of 6%, the industry is expected to reach a value of $28.5 trillion by 2025.
There are many finance companies distributed across the world. A quick inquiry around, and you will realize that most people do not know the roles of financing companies or the services that they offer.
To understand the roles and services of financing companies, you first have to know how they work.
How Do Financing Companies Work?
A quick look at financing companies and the first question one would ask themselves is where they get the money to offer services. They do not have people depositing and saving their money with them, so how do they afford the services?
Financing companies offer their services for business and personal purposes. Their financing comes from investors, federal reserve systems, or larger financial institutions. Most financing companies get their capital from banking institutions.
The finance companies get the money from banking institutions and then pay it back with accrued interest. This is the reason why financial institutions charge slightly higher interest rates as compared to banks.
However, the higher interest rates are not just there without any benefit. Many businesses fail to attain the requirements of banking institutions that get them eligible for loans. This is one of the leading factors that has led to the rampant popularity of financial companies.
Roles and Services of Financial Companies
Financial companies perform many functions. Let’s take a look at some of these functions below.
1. Unsecured Business Financing
In business, loans are something that business owners will find themselves in need of at some point. However, securing a loan can be difficult, especially for small businesses or startups.
Banking institutions use credit scores to determine whether they will give a business a loan. They also consider factors such as the assets that the business has. This, however, leaves many businesses unable to secure loans from banking institutions.
Financial companies use different methods to determine whether they can finance a business. Financial companies are known for taking risks. They offer small business financing to businesses that lack assets for auctioning, in case they default on the loan.
Small business financing has helped numerous businesses to navigate their financial obligations and duties. The small business financing offered by financing companies leads to the concept of unsecured business financing.
An unsecured loan is a loan given to an individual or a business without involving any collateral. Unsecured loans have greatly helped grow many businesses in different areas globally.
The unsecured financing options available to businesses include:
a) Payroll Funding
Payroll funding offers a business the amount of money it requires to pay its workers. Payroll funding helps businesses to build their workforce without hurdles along the way.
b) Business Emergency Funding
Another type of funding that a business can get from a financial company is emergency funding. Running a business, you are assured of having emergencies that will require money to solve. If such emergencies occur when a business does not have the money, it can be hectic.
Often, emergencies become more costly when they are not sorted out immediately. An example of a business emergency is the logistics vehicles failing. This is where business emergency funding comes in.
The business applies for the funding by submitting their business account bank records. Once the loan is approved, their limit is stated then they request an amount that lies within the stipulated limit.
c) Inventory Funding
After setting up a new business, often the startup cost exceeds the expectations and a business owner lacks funds for stocking up. The inventory funding option grants businesses money to purchase inventory for their business.
Inventory funding can also be used to purchase extra stock when the purchase price is low. It can be used to buy inventory before the government implements new taxes that will cause a spike in product prices.
2. Secured Business Financing
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Similar to banking institutions, financial companies can also offer secured loans. Secured loans are loans that are supported or backed up by collateral. The item you are looking to purchase with the loan can be the collateral or any other asset owned by the individual or business.
In most cases, the secured business financing option is often taken up by well-established businesses. This is because this financing option requires a good credit score and an asset of similar or greater value.
Similar to unsecured business financing, secured business financing has its benefits. It has lower interest rates as compared to unsecured financing. Secure financing also offers a higher loan limit as compared to unsecured financing. This is because the lenders have confidence in the individual or business paying back the loan.
The financing options available as unsecured financing are also available as secured financing. They come with the additional benefits of secured loans.
3. Purchase Price Loans
Businesses partnering with financial companies to offer loans to their clients is a common sight in this generation. Financial companies partner with different businesses, e.g., a car sales business, they offer to fund the purchase price for a customer. The customer then pays back the financial company later as stipulated in the loan contract.
This concept is most popular when it comes to the purchase of vehicles, tech gadgets, or houses. The option for purchase financing offers numerous benefits to all three entities in the deal. The three entities are the client, financial institution, and business.
Some of the benefits that this solution offers to businesses include:
- Better cash flow
- It attracts new clients
- Boosts sales by a significant margin
- Grants client loyalty, therefore, offering repeat business
Businesses that do not offer financing options should look into the concept, to ensure they do not miss out on the benefits it offers.
Finance is a wide topic, if you need training on financial modeling or corporate finance, here are your classes to consider.
Conclusion
As a business owner, it is vital to establish a good rapport and relationship with a financing company of your choice. Establishing a good rapport with a specific company will ensure that they are always there for you in the event of financial need. Establishing a good and long lasting relationship with a financing company will also help increase your credit score, and in turn, the loan limit.
