I.

Finance Companies
 Definitions Finance Companies
A finance company (FINANCE COMPANY) is a financial intermediary, often associated
with a joint stock company or manufacturer, that makes loans to individuals or businesses.
As a group, financial companies serve several distinct segments of the financial services
market. Finance companies owned by manufacturers, finance the inventories of their
dealers, and provide direct financing, sometimes below market rates, for consumer
purchases.
 Types of Finance Companies
1. Consumer Finance Companies
Consumer finance companies provide financing for customers of retail stores or whole-
salers. For example, a consumer finance company can sponsor a credit card for a retailer so
that the retailer can offer its own credit card for its customers. The customers can purchase
products there on credit, which is provided by the finance company.
2. Business Finance Companies
Business finance companies offer loans to small businesses. Business finance companies
also provide financing in the form of credit cards that are used by a business’s employees
for travel or for making purchases on behalf of the business.
3. Captive Finance Subsidiaries
A captive finance subsidiary (CFS) is a wholly owned subsidiary whose primary purpose is
to finance sales of the parent company’s products and services, provide wholesale
financing to distributors of the parent company’s products, and purchase receivables of the
parent company. The actual business practices of a CFS typically include various types of
financing apart from just the parent company business. When a captive is formed, the
captive and the parent company draw up an operating agreement containing specific
stipulations, such as the type of receivables that qualify for sale to the captive and specific
services to be provided by the parent.
 Finance Companies Operations (Sources and Uses of funds).
According to Nasdaq, the primary function of finance companies is to make loans to
individuals; they don't receive deposits as banks do.
1. How do consumer Finance Companies Operate:
Consumer finance companies operate by lending money to individuals who need funds for
personal expenses, such as medical bills, education, home repairs, or car purchases. They
may also offer credit cards, which allow customers to make purchases on credit. These
companies obtain the necessary funds for lending either through equity investments or by
borrowing from financial institutions, such as banks. They then charge interest and fees on
the borrowed amount, earning profits through this margin.
2. How do Business Finance Companies operate:
Business finance companies operate by providing funds to businesses to maximize profits
and minimize costs. Here are some key aspects of their operation:
－ Debt Financing: This is similar to taking a mortgage or an automobile loan. The
business applies for a loan from a bank or another lending institution. The lender
checks the business’s credit history and other sources before approving the loan. The
bank sets up payment terms, including interest. The advantages of debt financing
include no control or ownership by the lending institution over the business, and the
interest paid on debt financing is tax-deductible as a business expense.
－ Equity Financing: In this case, a firm or an individual invests in the business, meaning
the business doesn’t have to pay the money back. However, the investor now owns a
percentage of the business.
－ Mezzanine Capital: This combines elements of debt and equity financing, with the
lender usually having an option to convert unpaid debt into ownership in the company.
－ Corporate Finance: This involves how businesses fund their operations to meet day-to-
day cash flow demands and long-term financing goals. It also involves monitoring
cash flows, accounting, preparing financial statements, and taxation.
3. How do Captive Finance Companies operate:
The basic services of a captive finance company include basic card services like a
store credit card and full-scale banking. This can offer the parent company a significant
source of profit and limit the amount of risk exposure.
A captive finance company is usually wholly owned by the parent organization.

II. Finance Leasing Companies

 Definitions of Finance Leasing Companies
Finance leasing companies are entities that provide financing for the acquisition of assets,
typically for businesses. They facilitate lease agreements where the lessee (the business)
pays periodic lease payments to use the asset for a specified period, often with an option to
purchase the asset at the end of the lease term.
A financial leasing company is a credit institution. This credit institution has the function
of using equity capital, mobilized capital or other capital sources to finance rentals in the
form of machinery, equipment and real estate. Financial leasing companies provide
financial services and perform a number of other services according to the provisions of
law.
 Types of finance leasing companies
1. Domestic financial leasing
Domestic financial leasing is when a financial leasing company represents the Lessee to
purchase assets from a domestic supplier and sublease the assets to the Lessee according to
the payment schedule in the Lease Contract.
2. Imported financial leasing
Imported financial leasing is when a financial leasing company represents the Lessee to
purchase assets from a foreign supplier and sublease the assets to the Lessee according to
the payment schedule in the Lease Contract.
3. Financial leasing to buy and lease back
With this form of financial leasing, the financial leasing company buys the asset owned by
the Lessee and leases that same asset back to the Lessee in the form of financial leasing.
The lessee can continue to use the asset for its operations while the lessee has financial
difficulties paying the supplier.
4. Financial leasing and operating leasing - Operating leasing
This is a form of asset leasing, whereby the customer uses the leased asset from the
financial leasing company for a certain period of time and will return the asset at the end of
the lease contract. The financial leasing company retains ownership of the asset and the
customer is responsible for paying rent according to the contract.
 Differentiating operational leasing and finance leasing
Operational leasing:
Short-term arrangement where the lessor retains ownership of the asset.
Lessee pays periodic rental payments for the use of the asset.
The lessor is responsible for maintenance and insurance of the asset.
Typically used for assets with a shorter useful life, such as office equipment or vehicles.
Does not appear on the lessee's balance sheet.
Finance leasing:
Long-term arrangement where the lessee essentially owns the asset for the lease term.
Lessee pays regular lease payments, which include interest on the asset's full value.
Lessee is responsible for maintenance and insurance of the asset.
Typically used for assets with a longer useful life, such as machinery or real estate.
Appears on the lessee's balance sheet as both an asset and a liability.
 Finance Leasing Companies Operations
1. Financial company operates
- Receive organizational deposits.
- Financial leasing.
- Loans to supplement working capital for financial lessees.
- Operating lease with the condition that the total value of operating lease assets does not
exceed 30% of the total assets of the main financial leasing company.
- Implement other forms of credit when approved by the State Bank.
2. Financial design activities
The main financial leasing activity is to provide medium-term credit on a reasonable basis
for the main account and must meet one of the following conditions:
- When the agreed lease term expires, the lessee may receive transfer of ownership of the
leased asset or continue to rent according to the agreement of both parties;
- The lease term of a designed asset must be at least 60% of the time needed to perform
that leased asset;
- The total rental amount for an asset specified in the main asset lease contract must be at
least equal to the value of that asset at the time of signing the contract.
3. Account opening activities of the main account design company
- Financial leasing companies with deposits must open a deposit account at the State Bank
and maintain an average balance on this deposit account not less than the required reserve
level.
- Financial leasing companies are allowed to open payment accounts at commercial banks
and foreign bank branches.
4. Capital contribution and share purchase activities of the company for main finance
Financial leasing companies are not allowed to contribute capital, buy shares, establish
companies or affiliated companies in any form.
5. Other activities of the financial design company
- Receiving mining products from the Government, organizations and individuals to carry
out financial leasing activities. Receiving individual trust transfers is carried out in
accordance with the regulations of the State Bank.
- Participate in Treasury sealed container bidding organized by the State Bank.
- Buy and sell government bonds.
- Act as an insurance business agent.
- Providing consulting services in the fields of banking, finance, investment and financial
leasing.
- Buy and rent again.
- To sell accounts that must be consolidated for financial leasing to organizations and
individuals according to the regulations of the State Bank.