Finance Companies in the Modern age

We’ve all heard and seen over the past 3 years the issues with a lot of Finance companies, how many have not survived and how a lot of people have lost money by investing it with these types of lenders.

Finance companies are divided into two broad categories when it comes to how they gather funds in order to lend them out:

1.      Contributory funded – where the company gathers in small to large amounts from the general public with the promise of high returns commensurate with the risk that is taken with the on-lending of these funds. These are Finance companies that were often high profile as the more exposure they had, the more people invested in them.

2.      Privately funded – where wealthy individuals or groups of individuals pool their money in order to lend them out. These companies do not solicit investments from the public and get to decide when and where to invest. Where there are large sums of money put up by the individuals behind these companies they can often get Bank funding lines to complement their own deposits

Where does a Finance Company fit?

Finance Companies have always occupied the space which the trading banks see as too risky. As a result they enable projects, both large and small, to go ahead and develop to a stage where the trading Banks can see the merit in taking the deal over.

When would you use a Finance Company?

Finance Companies provide a great alternative to more conventional funding lines.

  • They are short-term funders – generally 6 months to 2 years maximum
  • They have higher interest rates and fees as they know they have a limited timeframe to earn from a deal
  • They often rely on a “take-out” to help approve a deal i.e. where there is a defined end-point to a project such as a sale of a property or a refinance by a Bank
  • With a take-out in place there is often much less emphasis on proving income if the equity in the project is sufficient
  • There is the ability to capitalise interest and fees through the project so the costs are all contained within the debt
  • They work well for “Property Traders” where they are happy for people to turn-over properties regularly for a profit when the Banks are not designed to do this
  • They can help “cleanse” a deal where there could be some credit issues or payment problems which mean a Bank is unwilling to take a client on. After 6 months of proven payments with a Finance Company it is often a lot easier to refinance back into a mainstream Bank

Given a lot of negative press around investing in Finance Companies, many people are still not willing to deposit their funds with them – but as second and third tier lenders they should never be counted out when it comes to borrowing from them for specific projects.