Finance Company: an economic entity, whose main purpose is to provide financial services to clients, including, in particular, the use of financial resources, i.e. collection and spending of cash, as well as provision of financial intermediation services. These institution are diversified groups based on loans procedure secured by fixed assets. Almost everyday citizens have a contact with an institution connected with finance operations, without realising its meaning. Obviously, all of the financial transations have to be rightfully in accordance with applicable law and recorded. There is not only one size of the finance companies, they can to don differential forms, started from really small size and ended on genuinely giant institutions. Financial companies have a substantial impact on country or global economy and also politics.
Type of financial institutions
There are many possibilities to classify financial institutions due to:
- the legal form: banking, non-banking, parabank
- coverage: local, national, international
- the purpose of the activity: commercial, non-profit
- the nature of the business: deposit, insurance, pension, investment
The most common is the functional classification of financial institutions and their apportionment into:
1.Depository institution, which are receiving cash deposits from consumers and companies to grant credits, loans or charging these funds with a risk in different ways. These istitutions are not loans institutions because, they only give loans from owners’ equity or emission indebted papers.
2.Risk diffusion institutions – are mainly insurance companies that take over the insurance risk of units in exchange for a small (against this risk) insurance premium, dissipating insurance risk to a larger population.
3.Investment institutions – are interceding in investing financial resources in profitable enterprises of various risk level; for example: investment funds, pension funds, investment banks etc.
Niche markets of finance companies
All sized financial companies are concentrating their strategies on niches. These market segments required accurate and alternative knoweledge.The niche strategy depend on avoiding direct competitions between banks and financial companies. Instead of this, financial companies reached another special segments on markets, by offering service (an ideal surrogate for bank credit).Many of these companies have chosen niches by lending to customers of their indirect products or by investing in market segments blocked to banks by adjusters constraints.
„Too big to fail” policy
This sentence is extremely connected with finance company and provokes a lot of emotions. Firstly it forces to consideration what may happen when huge financial companies go bankrupt. Secondly, what are the consequences going to be for society and people who are not directly related to this situation. The global crisis can be started by bankruptcy of one of the financial institution, like it happened from 2008 by information about bankruptcy of Lehman Brothers bank. Lehman brothers bank was an American bank, one of the biggest investment banks in the world, founded in 1850 by Henry, Emanuel and Mayer Lehman. In this context, term “too big to fail” means that in case of danger, government should help financial institutions to regain financial balance. Investment in Lehman Brothers bank seemed to be safe option for his clients because of its reputation, long tradition but also high position in the world bank ranking. As a leader, Lehman Brothers bank gained people's trust and invested their money without any suspicions till its spectacular collapse. One of the main reasons of this crisis was breaking down of a “price bubble” known also as Speculative Bubble, but also cheap and available credits. That encouraged people to invest money in real estate market, before they realized that they could not afford expensive credits and were forced to sell them at a loss. The fact is that FED (Federal Reserve System, which is United States’ central bank) has to spend a huge amount of money to fight the consequences of this famous bankruptcy. Still, years after this collapse many entrepreneurs feel its effects. Besides lending money, finance company can provide many different services, as for example: Insurance (many variations) for his clients, in case of risk of losing money, the organization can guarantee partial or complete refund of invested funds to their clients, under certain conditions, described in contract. Money exchange - financial company can exchange one currency for another, charging or giving to a client the amount according to the contract.
In most countries, the operation of financial institutions is subject to more or less strict state control. It seems that the best way to choose the more suitable financial institution is not only to analyse your budget and your needs but also to check several variants, offered by different finance companies. To choose the best option for you or your business, you should consider only these options where your money is safe.
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- Goedhart M., Koller T., Wassels D (2010).’’Valuation Measuring and Managing the Value of Companies’’.ISBN 978-0-470-42469-8, p.489-559.
- Remolona E.M., Wulfekuhler K.C., (1992) ‘’Finance Companies, Bank Competition, and Niche Market’’, New York, p. 25-34
- Kaplan A. S. (1985) Lehman Brothers: 1850-1984: a chronicle. New York: Lehman Brothers
- E.M.Remolona, K.C. Wulfekuhlerhttps(1992).
Author: Daria Maniak